RBI favours freeing cap on savings rate
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April 28: The Reserve Bank’s (RBI) draft paper favouring deregulation of the interest rate on savings bank accounts has evoked a cautious response from lenders who said the proposal would increase cost of operations. While the RBI argued that the freeing of savings deposit rate would increase competition and innovation and benefit depositors, bankers said it could lead to higher transaction costs. “Deregulation will also allow banks to introduce product innovations, which could also benefit the depositors,” the RBI said in its draft discussion paper, while inviting public comments on freeing the interest rate on savings account.
While the RBI deregulated interest rates on fixed deposit schemes in 1997, it continues to fix the rate on savings deposits. Presently, banks pay interest at the rate of 3.5 per cent on saving accounts, which was fixed in 2003. Commenting on the draft discussion paper, ICICI Bank managing director, Ms Chanda Kochhar said: “It needs to be looked at in conjunction with other offerings on a savings account. It is not the interest rate alone which we should look at, but also at the transaction charges.” I feel, if the interest rates go down, transaction charges will have to go up and vice versa. We will have to deregulate the entire product and not just the interest rate,” she said.
Meanwhile, Indian Bank chairman and managing director, Mr T.M. Bhasin, said in the deregulated scenario saving rate would be market determined. The savings rate would be market determined, he said, adding, banks would put transaction charges for some services. Currently, banks offer free cheque book, debit or ATM and cash handling. Savings deposits are a popular product and they constitute about 22 per cent of total deposits of scheduled commercial banks and about 13 per cent of financial savings of the household sector.
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