1. Should Savings Bank Interest
rates be Deregulated?
Kaul Manish
Kazim Abbas
R Krishnaswamy
Mahesh Warrier
Mhaske Deepti
Pai Priti
Yadav Rajesh Kumar

2. What is Deregulation?
• Removal or simplification
of government rules and
regulations .
• It is moving towards a
more laissez-faire, free
market.
• It is different
from liberalization.

3. What is a Savings Account?
• Savings accounts are accounts maintained by
individuals or financial institutions.
• A savings deposit is a hybrid product.
• Savings accounts are maintained for both
transaction and savings purposes.
• Provides convenience.

4. Features of a Savings Account
• Free withdrawals
• No ceiling
• No limit on the number of cheques.
• Minimum balance is stipulated.

5. History
• India pursued financial sector reforms in the
early 1990s.
• Deregulation of interest rates was intended to
strengthen the competitive forces.
• The issue was 1st taken up in the Annual
policy statement of 2002-03.

6. • The interest rate on savings bank deposit has
been progressively reduced.
• March’03-10 :- 3.5%
• May 10 :- 4%

7. Trends
Period Demand Savings Bank Term Deposits Aggregate
Deposits Deposits Deposits
1 2 3 4 5
1981-1990 19.5 17.1 19.8 18.9
1991-2000 12.5 15.7 17.4 16.1
2001-2010 16.2 19.4 18.2 18.2
(a)2000-05 12.8 18.8 14.8 15.4
(b)2005-10 19.7 20.1 21.7 21.0

8. Guidelines
• A uniform interest rate
on savings bank deposit
upto Rs. 1 lakh.
• For savings
bank deposits over Rs.1
lakh, a bank may
provide differential rates
of interest.

9. Pros of Deregulation
• Regulation of interest rates imparts rigidity
• Provide wider options to Depositors
• Differential interest rates leads to reduction in
the share of savings bank deposits in total
deposits.

10. • Will Improve Transmission of Monetary
Policy
• May Lead to Product Innovations
• Good impact on rural and semi-urban
depositors

11. Cons Of deregulation
• Possibility of an Unhealthy Competition
• Risk of Asset Liability Mismatches
• May Lead to Financial Exclusion
• Could Adversely Affect Small
Savers/Pensioners

12. • Possibility of Introduction of Complex and not so
Easily Understood Savings Products
• Transfer Of cost to the Customer
• Create the rich poor divide.
• A blow to the profitability of Banks.
• The timing is not right because of volatility of the
market situation

13. International Experience:-
• Eg: Canada, Japan, Australia, New Zealand,
UK, and USA
• Asian Countries:- Singapore(between 0.25 and
0.35 ), Philippines, Indonesia, Sri Lanka,
Taiwan(0.31), Malaysia(between 0.40 and
0.70)
• Hong Kong- the most recent one (2001)

14. Expert’s View
• The deregulation of SB rates should have been
accompanied with other essential reforms – like
the reduction in the overall resource preemption
levels, liberalisation of priority sector lending
norms, deregulation of other administered rates
like interest rates on crop loans or export credit
and so on – for the creation of a fair, market-
driven banking system.
-DR RUPA REGE NITSURE
Chief Economist, Bank of Baroda

15. There are four reasons for banks to cheer.
• The freedom to price around a quarter of available
funds gives them better control
• Free pricing helps banks manage their costs more
efficiently.
• Banks can increase or decrease this reservoir of
funds to the extent that is possible.
• Asset-liability management becomes easier.
-MADAN SABNAVIS
Chief Economist, CARE Ratings