Matter of interest

An important part of the Reserve Bank’s latest monetary review was the announcement of development and regulatory policies related to banking, which were least expected. These decisions will be widely welcomed because they have been sought by individual customers and others for a long time. Savings bank interest rates were deregulated with immediate effect and banks will now have more freedom to open branches in Tier 2 cities. Banks will be happy with the latter decision but are not comfortable with the prospect of paying higher rates of interest on savings deposits, which they had always opposed. The banks had even opposed a recent increase in savings bank interest rates from 3.5 per cent to 4 per cent.

They were also not pleased with the RBI’s decision  that interest rates were to be calculated an a daily basis.

Administered interest rates will now be applicable to savings of less than one lakh rupees and some small savings schemes of the government. Banks can competitively offer higher interests on deposits of above one lakh. Some of them have already started making the offer. The profits of some banks may be hurt in the short term because of the higher interest outgo. It is estimated that the impact may be about Rs 15,000 crore for all banks put together and about 15 to 20 per cent of their present profits. Public sector banks may be affected more than others because their dependence on low-cost funds is greater. Banks have earned good profits on the strength of the cheap funds available to them in savings and current accounts.

They will now have to look for ways to make up for the higher interest payment. It is likely that the charges  for use of ATMs, money transfers and cheque books will go up in consequence.

Banks should actually see an opportunity in the need to offer higher interest rates.

By competitively offering higher rates they can attract more deposits and earn greater profits. They will also have to increase efficiency and productivity and employ better banking practices. With bank interest rates being competitively fixed, provident and other small savings interest rates may also have to follow suit sooner or later. Small savings collections have recently shown a tendency to fall, as bank savings had become more attractive than them. That should push the government to action.