Pros and Cons of Savings Rate Deregulation

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Pros and Cons of Savings Rate Deregulation
Otherwise insipid and to some extent a,’Cut, Copy, Paste’ 2nd quarter monetary policy review of RBI had not much for market and investors. Repo and reverse repo rates were increased by 25 basis point which was on expected lines. There were some known concerns mentioned in the review document like increasing crude oil prices, depreciating rupees etc. However what took market, particularly bankers by surprise was the central bank’s move to deregulate interest rate on saving bank account. On savings rate deregulation, the policy document says that banks are free to determine their savings bank deposit interest rate, subject to the following two conditions:

(i) First, each bank will have to offer a uniform interest rate on savings bank deposits up to 1lakh, irrespective of the amount in the account within this limit.
(ii) Second, for savings bank deposits over 1 lakh, a bank may provide differential rates of interest, if it so chooses. However, there should not be any discrimination from customer to customer on interest rates for similar amount of deposit.

The policy document says that operational guidelines will be issued in this regard separately. After RBI issued policy document, Yes Bank came out an announcement saying that the bank has revised interest rate on savings deposit to 6% from 3.5 percent. Since interest rate on savings deposit was fixed till the time changes were done by RBI, it took bankers as well as depositors by surprise.

IndusInd Bank also changed the savings deposit rate to 6% on a minimum deposit of rupees one lakh.

Does the savings rate deregulation mean that a new rate deposit rate war will start among bankers? It is interesting to note that savings and current deposits are source of cheap funds for banks. Popularly known as CASA (Current Account and Savings Account) deposits, these deposits help banks in maintaining NIM (net interest margin is difference between average rate of borrowing and lending by banks) which defines their profitability. That is the reason some of the banks have gone on record to say that they are not keen to raising savings deposit rates now.

However considering the competitive banking environment, they may be forced to change the rates in the days to come if too many banks go ahead and change their interest rates on saving deposits.

Who are going to benefit from these rate changes? How will it impact small depositors? Answer to these questions are simple, however some of the beneficiaries of this change will be:

1) Salaried employees, who receive healthy salary especially in six digits every month. Though the number is not very high as of now, this is going to go up gradually. Many banks may restructure salary account benefits based on these high rates.

2) All the depositors who keep emergency fund in savings account will be another set of beneficiary as 6% rate is a good return.

3) In case banks change interest rates for deposits below one lakh, the depositors in general will benefit from this.

However, there are two key areas of concern. Since deposit rate on savings account is going to go up, the cost of borrowing for banks will also go up. It is natural that banks will also increase lending rates. So it is not good news for borrowers of money from banks. Also now that interest rates have been deregulated, the savings rate may fall in future if interest rate softens.

InvestmentYogi

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