BANKS SAY TIME NOT RIPE TO DEREGULATE SAVINGS RATE

Banks have moved the Reserve Bank of India to defer the proposal to deregulate the interest rate on savings bank (SB) deposit till such time that interest rates don't moderate.

Unshackling the interest rate on SB deposits in the current rising interest rate regime could set-off unhealthy competition, fear bankers.

This could prompt banks to jack up their SB rates in their attempt to outbid rivals, with attendant consequences for net interest margins (net interest income/ earning assets).

The RBI should consider ushering in deregulation of the SB deposit rate only when the interest rate is falling as banks then will not attempt to outdo each other by quoting attractive interest rates, said a senior public sector banker.

SPREAD WIDENS

The spread between the SB rate (4 per cent) and fixed deposit rates (according to the RBI, the average of major banks for term deposits of more than one year maturity is 8.25/9.10 per cent) has widened to 4.25/5.10 percentage points over the last one-and-a-half years.

Should the RBI free the SB rate when interest rates in the economy are headed north, then it will have a telling impact on banks' net interest margins, the banker said.

Around this time last year, the spread between the SB rate (3.5 per cent) and fixed deposit rates (average of major banks for term deposits of more than one year maturity: 6.00/7.50) was lower at 2.50/4.00 percentage points.

If the RBI allows complete deregulation of the interest rate on SB deposits at a time when interest rates are rising, then it will set off a price war, leading to banks, especially from the private sector, offering even 5-6 per cent interest on these deposits, according to a bank economist.

Bankers from the public sector have an apprehension that the proposed deregulation by the RBI could see a portion their assiduously built SB portfolio getting shifted to private sector banks as the latter typically have a proclivity to attract depositors by offering slightly higher interest rates.

GIVE A FREE HAND

If the RBI ushers in deregulation then banks want a free hand to innovate as well as price their SB deposit schemes, as per the feedback given by banks to the RBI. SB depositors can expect a differential treatment in a deregulated regime. Those maintaining higher balance could earn higher interest rate and enjoy free transactions while those maintaining lower balance would earn lower interest and get charged for transactions.

Meanwhile, the All India Bank Depositors Association said the RBI should determine the floor rate for SB deposit interest rate without prescribing any ceiling.

To protect the small depositor and ensure healthy competition, the RBI should determine the floor rate from time to time depending on the market conditions and the prevailing inflation scenario without prescribing any ceiling rate, suggested the Association.

SOURCE: http://www.thehindubusinessline.com/industry-and-economy/banking/article2139645.ece