2. What is DEREGULATION ?
It means it will not be under control of RBI
anymore. The interest rates will differ for
each bank. The banks will decide the
interest rates based on their financial
condition and other factors. The
deregulation puts more competition
among the banks to attract more savings
bank account holders.
3. As a part of financial sector reforms,
the Reserve Bank has deregulated
interest rates on deposits, other than
savings bank deposits. The interest
rate on savings bank deposits has
remained unchanged at 3.5 per cent
per annum since March 1, 2003.
4. An attempt was made to deal with
pros and cons of deregulating savings
deposit interest rate and take on board
the suggestions of various
stakeholders for either maintaining the
status quo or deregulating the saving
deposit interest rate.
5. HISTORY BEHIND
DEREGULATION
India pursued financial sector reforms
as a part of structural reforms initiated in
the early 1990s. A major component of
the financial sector reform process was
deregulation of a complex structure of
deposit and lending interest rates.
The administered interest rate structure
proved to be inefficient. It, therefore,
became necessary to reform the interest
rate structure.
6. What is the need of
Deregulation?
What are the factors that
intended deregulation to
occur?
7. Deregulation is needed to :
Strengthen the competitive forces,
Improve allocative efficiency of
resources,
Strengthen the transmission of
monetary policy,
Product innovation,
Price discovery.
8. A few categories of interest rates that continued to
be regulated on the lending side were small loans
up to 2 lakh and rupee export credit, and on the
deposit side, the savings bank deposit interest rate.
The rates on small loans up to 2 lakh and rupee
export credit were deregulated in July 2010, when
the Reserve Bank replaced the Benchmark Prime
Lending Rate (BPLR) system with the Base Rate
system. With this, all rupee lending rates were
deregulated. On the deposit side, the only interest
rate that continues to be regulated was the
savings deposit interest rate .
9. The Annual Policy Statement of 2002-03
had weighed the option of deregulation of
interest rate on savings bank deposit
accounts but the time was not considered
opportune considering that a large portion
of such deposits was held by households in
semi-urban and rural areas. It was,
however, argued that deregulation would
facilitate better asset-liability management
for banks and competitive pricing to benefit
the holders of savings accounts.
10. The issue was again revisited in the Annual
Policy Statement for the year 2006-07. In
this context, the Indian Banks’ Association
(IBA) while making out a case for
deregulation of savings bank deposit rates
in the long run, suggested for status quo in
2006.
In pursuance of the announcement made in
the Annual Policy Statement for the year
2009-10, the Reserve Bank advised
scheduled commercial banks to pay interest
on savings bank accounts on a daily
product basis with effect from April 1, 2010.
11. Prior to the introduction of a daily product
method, the interest on savings deposit
account was calculated based on the
minimum balance maintained in the
account between the 10th day and the last
day of each calendar month and credited to
the depositor’s account only when the
interest due was at least 1/- or more. After
the change, the effective interest rate on
savings bank deposits increased, thereby
benefitting the depositors.
12. The concept of savings
account
•A savings deposit is a hybrid product which combines the
features of both a current account and a term deposit account.
•While a current account is primarily meant for transaction
purposes and is maintained by companies, public enterprises
and business firms for meeting their day-to-day requirement of
funds, savings accounts are maintained for both transaction and
savings purposes mostly by individuals and households.
•A savings account being a hybrid product provides the
convenience of easy withdrawals, writing/collection of cheques
and other payment facilities as well as an avenue for parking
short-term funds which earn interest.
•The maintenance of savings bank deposit accounts, however,
entails transaction costs. Where as, a term deposit doesn't
involve transaction cost for banks.
13. • The average annual growth of savings deposits, which decelerated in the
1990s compared with that of the 1980s, accelerated sharply in the decade of
the 2000s.
• In this decade, the average growth rate of savings deposits exceeded that
of demand and term deposits, notwithstanding the growth in term deposits
outpacing that of savings deposits during 2005-10.
• The Credit Policy of May 27, 1977 for the first time drew a distinction
within savings deposit accounts in that a part was considered as functionally
transactions-oriented vis-à-vis the remaining part that had features akin to
savings.
• Accordingly, the Reserve Bank, with effect from July 1, 1977, fixed the
interest rate on savings deposits with cheque facilities, considered as
transactions-oriented accounts, at 3.0 per cent and the interest rate on
savings deposits without cheque facilities, considered as pure savings
accounts, at 5.0 per cent.
• However, the Credit Policy of March 2, 1978 merged these two accounts
into a single savings account, on account of many depositors opening
multiple accounts.
14. History of Savings Bank Interest Rates
March 2, 1978 – Interest rate @ 4.5 %
p.a
April 24, 1992 – Interest rate @ 6.0 %
p.a.
March 2003 – Interest rate @ 3.5 %
Presently 4 @ p .a.
15. Ownership Pattern of Savings Deposits
The data on the ownership pattern of savings deposits during 1998-2009 reveals that
savings deposits are predominantly held by the household sector.
(per cent) Sector 1998 2009
1 2 3
I. Household Sector 84.8 83.6
II. Government Sector 8.4 9.1
of which: 3.3 5.3
State Government 1.9 1.7
Local Authorities 1.7 1.2
Public Sector Corporations
and Companies
III. Foreign Sector 5.3 6.0
IV. Private Corporate Sector 0.2 0.4
(Non-financial)
V. Financial sector 1.4 0.8
VI. Total 100 100
16. Costs incurred by a bank in
maintaining the savings account
Interest payments to account holders
Computer costs
Staff salary
Passbook costs
Printing charges
Intimation costs for inoperative accounts
Costs incurred in case the customer withdraws a large
sum from the bank immediately.
17. Two major changes
•Change in the interest calculation methodology
The interest calculation methodology has been
shifted from minimum balance between 10th and last
day to the daily product basis with effect from 1st
April, 2010.
•Deregulation of Savings account interest rates
Recently, the savings deposit rate has also
been increased by 50 basis points to 4%. In simple
words, deregulation is removing RBI’s control over
the prevalent interest rates for banks’ savings
accounts.
18. How savings account interest is calculated?
•Earlier, interest was calculated on the lowest amount available in savings
account from 10th to the end of month. The disadvantage is that if you have a
low balance on any of these days, you will get interest on that amount only.
For example:
If the account shows the following balance for the month of February 2010:
Interest will be received on 1,000/- rupees, which is the lowest balance
available in the account.
According to the new circular from RBI, banks have to calculate the interest
on a daily product basis and this must be implemented from April 1, 2010.
This way savings account holders will not lose interest for even a rupee.
19. DEREGULATION
-Effective 25 October,
2011
RBI has explicitly sent notification to the banks for changing their
savings bank interest rates. The banks are now free to set their interest
rates for their customers.
Conditions
• Uniform rate to all customers having savings account balance of up to
Rs. 1 lakh. For balances above Rs. 1 lakh, banks are free to choose
interest rate bands.
•Banks can create a tier structure for interest rates on balances of over
Rs. 1 lakh, so they could offer 5% for balances between Rs. 1 lakh – 5
lakh, and 6% for balances over Rs. 6 lakhs and so on.
The way the interest is calculated should remain the same – that is the
daily balance method that’s currently followed and banks shouldn’t get
back to their gimmicky ways of taking the minimum balance in a month
etc.
20. Important aspects regarding deregulation
•New banks can now offer a higher interest rate to persuade customers to move
away from their old banks. But as can be visualized, the interest rates paid by all
banks on their savings accounts will rise. This will adversely affect banks’
profitability.
•The banks will compete with each other on savings account interest rates
therefore, a customer will benefit in the form of higher interest rates.
•When banks had to pay just 3.5% as interest, they were able to give free
chequebooks, allow free cash withdrawals and charge a nominal fee for other
services.
•Ifbanks have to remain profitable, they have two options. First, increase the
lending rates to ensure the same profitability in spite of paying a higher savings
account rate. Second, cut costs related to savings accounts.
•As can be seen, banks have increased interest rates to get more savings
accounts. But at the same time, they will be forced to remain competitive by moves
such as an increase in the minimum balance requirements, having a tiered interest
rate structure (wherein better rates are offered to customers with a larger balance),
imposing a charge for issue of chequebooks and so on.
21. Few Banks join the race
Initially, the banks which have hiked the interest rate are:
•Yes Bank
•Kotak Mahindra Bank
•IndusInd Bank
Reason
• Fewer savings
accounts
Relatively new
• Do not have a strong
players
retail portfolio
23. What prompted Yes Bank?
The prompt move to inject deposit hike comes on the back of its :
- lowest share of savings bank deposits to total deposits in the whole
industry (3% CASA deposits)
- Hardly 1% or 2% of the private lender’s deposits come from Savings
deposit funds.
Thus, this private bank always had more room to capitalize on free interest rate
regime unveiled by the country’s apex banker.
24. SBI says no immediate hike in saving deposit rates
On the other hand, India’s leading state-owned bank SBI has not yet
hiked the savings deposit rates.
State Bank of India: The rate will be increased by upto 1.25%, thus
making it 5.25%. The decision is not yet taken.
• In contrast to Yes Bank, SBI already has 34% of its total deposits in
savings bank account – which is amongst the highest industry ratio in
terms of holding low cost funds to total deposits. Thus, SBI is seen in no
hurry to introduce the deposit hike in very near-term.
•The banks which have raised savings deposit rates lack reach.
• The bank is sitting on a huge deposit base and has no concern
regarding cost of deposits going up due to the deregulation.
•The total deposits in SBI's savings accounts are to the tune of nearly Rs
3.5 lakh crore, and a hike of one per cent in interest would mean that it
would cost the bank Rs 3,500 crore, which will have to be passed on to
the customers
25. • Lakshmi Vilas Bank can decide to give its savings account holders 5%
while ICICI may decide to give its account holders 4%.
• Vijaya Bank - Savings Bank - 4.00 % p.a (Effective from 03 - MAY 2011)
•Sincethe large banks like SBI, ICICI Bank, Punjab National Bank (PNB)
and HDFC Bank have not made any changes in their interest rates, other
smaller banks have not felt the need to change the status quo.
•The country's largest urban cooperative Saraswati Bank announced on
November 29 that it would offer 6% interest on savings deposits which will
be payable every quarter.
•Axisand Bank of Baroda offers Savings Account Deposit Interest Rate @
4% (for all amounts).
26. Banker’s Point of view
•As an impact of the soaring inflation, the real rate of
interest on savings is negative and hence deregulation
seems inevitable. However, banks hold a mixed opinion
on the same.
•While the state-owned banks are more in favour of the
regulated savings deposit rate, the private banks are
mostly in favour of deregulation.
•Many banks affirm that if interest rates are to be
deregulated then RBI should also deregulate the
maintenance charges.
27. Effect of Deregulation
Competition
Increase in Interest rate
Reduction in Net Interest
Margin
if not balanced by increase in lending
rates
28. •Large Public sector banks like Punjab National Bank are
examining ways how to offset the increase in Savings
Bank Account.
•The bank has SB deposits aggregating Rs 1 lakh crore.
Increase in Increase of Rs.
SB interest 1,000 crore in
rate by 1% interest payments
29. International Experience
Deregulation of savings bank deposit
accounts in select developed and
emerging market countries.
Interest rates on savings account in
developed countries such as Canada,
Japan, Australia, New Zealand, UK,
and USA are all deregulated and
determined by the commercial banks
themselves on the basis of market
interest rates
30. Many countries in Asia experimented
with interest rate deregulation to
support overall development and
growth policies
Interest rates were fully deregulated in
Singapore in the mid-1970s, and in
the Philippines, Indonesia and Sri
Lanka in the early 1980s.
31. Malaysia, Thailand and the Republic of
Korea engaged in a gradual deregulation
process, characterised by more frequent
adjustments and the removal of some
ceilings
Interest rates on bank deposits in Hong
Kong, which were regulated by a set of
interest rate rules (IRRs) issued by the
Hong Kong Association of Banks
(HKAB), were deregulated in phases by
July 2001
32. In response to the deregulation, a
number of banks launched new
products such as combined savings
and checking accounts and Hong
Kong inter-bank offered rate (HIBOR)
linked savings products
Some also revised fees and charges
and minimum balance requirements,
and introduced tiered structures of
interest rates
33. Based on an examination of the effects
of interest rate regulation and
subsequent deregulation on the efficacy
of monetary policy and rigidity of retail
bank deposit rates in Hong Kong, Chong
(2010) found that interest rate
deregulation had increased the efficacy
of monetary policy by improving the
correlation between retail bank deposit
rates and market interest rates and
increasing the degree of long-term pass-
through for retail bank deposit rates
34. Rates on savings accounts in China
are regulated by the Peoples’ Bank of
China, which specifies ceiling interest
rates on these accounts
DBS Bank, Singapore provides a
facility that combines the current
account and savings account, but has
a higher minimum balance to be
maintained and the customer is
charged
35. In countries in which financial sector
reforms also included interest rate
deregulation, the action was primarily
taken because real rates were
negative, and were being propelled by
inflationary pressures
36. On the whole, cross-country
experience shows that in most
countries, interest rates on savings
bank accounts have been deregulated
and are now fixed by commercial
banks based on the market interest
rates
37. Pros and Cons of
Deregulation of
Saving Account
Interest Rate
38. Merits
Will enhance the attractiveness of
Saving Deposits.
Regulation of interest rates imparts rigidity to the
instrument/product as rates are either not changed in
response to changing market conditions or changed slowly.
This adversely affects the attractiveness of a
product/instrument.
Will improve transmission of monetary
policy.
For transmission of monetary policy to be effective, it is
necessary that all rates move in tandem with the policy rates.
This process, however, is impeded if the interest rate in any
segment is regulated.
39. Co -relation among various rates
Interest Rate Co relation Coefficient
Term Deposit Rate and Monetary .82
Policy rates
Saving Deposit Rate and Monetary .18
Policy Rates
40. Will lead to product innovation
Savings deposits constitute about 22 per cent of total
deposits. However, owing to regulation of interest rate, there
is hardly any competition in this segment with both banks and
depositors acting passively. This has inhibited product
innovations.
May lead to financial inclusion
Increase in SA Interest rate would encourage
people in rural and semi urban areas to park more
funds in Saving Account which can actually fulfill
India’s objective of Financial Inclusion.
41. Demerits
Possibility of unhealthy competition
A major attraction of savings deposits for
banks is that it offers a low cost source of
funds. If deregulation happens, it will push
up the cost of funds of the banking sector.
This, if passed on to the borrower, will raise
the cost of borrowings and if not, it will
affect the interest margins and profitability
of the banking sector.
42. Share of CASA Average cost of deposits(Per cent)
Public Sector Banks
1-30% 6.19
30-40% 5.83
40-50% 5.41
50% and above NA
Private Sector Banks
1-30% 6.66
30-40% 5.59
40-50% 5.18
50% and above 4.51
43. Risk of Asset-Liability mismatches
Although savings bank deposits represent short-
term savings and withdrawable on demand, a large
part of savings deposits is treated as ‘core’
deposits, which together with term deposits have
been used by banks to increase their exposure to
long-term loans, including infrastructure loans.
deregulation may have the potential to create asset
liability mismatches as some banks with large
dependence on savings deposits for financing
long-term assets may lose savings deposits to
some other banks.
44. Year Term Deposits of more Term Loans/ Total
than 3 years/Total Term advances
Deposits
2001 31.7 36.7
2002 28.7 42.2
2003 23.9 44.5
2004 27.8 49.0
2005 26.5 54.1
2006 24.5 55.9
2007 22.6 57.7
2008 23.1 58.0
2009 20.2 57.1
45. Share of CASA Average Term Loans/
Total deposits ( %)
20-30% 52
30-40% 60
40-50 % 64
46. Could adversely effect Small
savers/Pensioners
There could be occasions, especially when the
liquidity is in surplus, when savings deposit interest
rates may decline even below the present level.
This will affect the income flow to small
savers/pensioners.
Possibility of introduction of complex
Saving Products
It is also possible that banks introduce some
complex products, which may not be so easily
understood by savers .
53. What is CASA ? ?
Casa is basically the current and savings
account deposits. Casa ratio is the share of
current and savings account deposits to the
total deposits of the bank.
What is NIM ? ?
NIM is essentially the difference between
the total interest earned and total interest
paid as a percentage of total assets and it
shows the average margin a bank makes
by borrowing and lending funds.
54. Points in favour of Private Sector
Banks( if they increase SA ROI)...
Increase in ROI would increase
CASA
Increase in CASA would increase
deposits available for Term Loans
Low cost of funds
BUT
All this at the cost of decrease in NIM
Still Pros > Cons
55. Arguments against Public Sector
Banks
If they increase ROI
Huge impact on NIM
HDFC Bank has the highest share of Casa to total
deposits at 52%, followed by the State Bank of India at
48% and ICICI Bank at 45%.
If they don’t increase ROI
CASA might shift from Public Sector Banks to
Private Sector Banks
Asset Liability Mismatches
Increase in cost of funds
56. Arguments in favor of Public
Sector Banks
Mathematical Analysis
Let’s calculate how much a 1.5% hike in savings rate
means for a Rs 50,000 balance. In a year it amounts to
an additional interest of Rs 750, or Rs 63 more per
month, before tax. If your bank hikes savings rate by
100 bps compared with 200 bps by another bank, and
you switch banks, then you stand to earn only R83
more every month for a bank balance of Rs 1 lakh.
Safety factors
57. Other Alternatives
Liquid MFs
Liquid and ultra short-term funds have offered
about 7-7.5% return per annum. Further, dividends
in liquid funds and ultra short-term funds are taxed
at 27% and 13.5% respectively, compared with
30.9% at which your savings bank account interest
is taxed.
Sweep in Accounts
A bank account that automatically transfers
amounts that exceed a certain level into a
higher interest earning investment option at the
close of each business day. Commonly, the
excess cash is swept into money market funds
58. Saving Bank Account
( Money earns 4-6% Auto Sweep Bank Account
ROI)
Auto-
Sweep Acc
ROI
Saving Acc
ROI
59. Why settle for 6% on your savings
account when short-term FDs can
give 8-8.5%?
60. CONCLUSION
The big players of the banking industry would still
continue to rule.
The cost of funds for many banks dependent on
CASA deposits will rise, but the depositors will now
get a more market-determined rates attuned to
inflation and policy rates. Banks will now have to
focus more on managing asset-liability mismatches
and fund management rather than rely on low cost
deposits.
The NIMs of banks will also shrink and increasing
focus will be on efficiently managing cost of
operations. In effect, this will bring better efficiency
in the banking system.
Hinweis der Redaktion
real savings deposit rate , widening of interest rate differential between term deposits and savings deposits leads to reduction in the share of savings bank deposits in total deposits, Deregulation of the interest rate on savings deposit will make the rate flexible along with other interest rates depending on the market conditions. Since savings bank deposits in rural, semi-urban areas and urban areas are held largely for savings purposes, deregulation of interest rate is likely to enhance its attractiveness in these areas. (about 22 per cent) , hongkong exp
Competition,branches, web-based channels, ATMs etc. degree of liquidity offered such as notice period for withdrawal, number of deposits and/or withdrawals allowed per month and percentage of amount that can be withdrawn in any given month, among others , hongkong exp
However misselling, customer complaints
While banks do not pay any interest on current account, interest paid on savings account deposit is 4%.
For State Bank of India, which has the largest deposit base, a 100 bps increase in savings rate can potentially increase their annual interest expense (for the rest of the fiscal) by 4-5% or Rs 1,400-1,500 crore.
Not a large incentive to move your account, you’d say.