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Savings Bank Accounts- Interest Rate Deregulation

For long, the regulated savings bank (SB) interest rate remained downward sticky even when the market conditions were favourable for an increase. This could be attributed, among other reasons, to commercial banks‟ prevail in convincing the Reserve Bank of India (RBI) on its excessive cost in maintaining such accounts.

However, with the advent of technology in servicing the account (like ATM, NEFT, Core Banking Solutions, Net-Banking, Inter-Bank Mobile Payment Service, etc.), the cost to serve, for the providers, has drastically reduced. This fact never got discounted appropriately while arriving at the SB interest rate or even the service fees. As a consequence banks gained considerably (net profit of scheduled commercial banks for 2009-10 being ` 57,109 crore) through unwarranted high net interest margins and service fees and commissions.

The SB interest rate was decreased in March 2003, from 4% to 3.5%, when inflation was around 3%. In April 2010, after RBI changed the method of calculating interest on SB accounts, the depositors saw an increase in their returns on savings. However, the fluctuating inflation has been very high in recent years. The SB deposits are the major source of savings (investment) for many depositors, including pensioners, small savers and senior citizens. Not having the ability to be good money managers, such persons are getting high negative returns on their hard earned monies.

This raises several questions: (a) How long can RBI maintain status quo by focusing only towards banks‟ interests and depriving depositors by not offering meaningful net return? (b) Is it an opportune time to completely deregulate the SB interest rate? (c) Is it time to partially regulate through prescription of only a floor on the SB interest rate (thereby protecting bulk of such savings depositors held by households, including households in rural and semi-urban areas)? (d) What are the related regulatory issues concerning SB accounts? We attempt to address these in this note.
Source: Indian Institute of Technology Bombay
Author: Ashish Das

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