Thursday, September 23, 2010

Bankers against deregulation of savings accounts interest rate

The Reserve Bank of India (RBI) wants to deregulate the interest rate on saving accounts to smoothen monetary policy transmission, as it feels is being hampered by the current fixed-rate regime. But RBI’s move is facing stiff resistance from the banks.

A 3.5 per cent a year, interest on savings accounts is the only regulated rate left in the Indian banking system and is highly controversial, given its impact on the common man. The banks fear that by making this product low – cost product can bring instability in the market.

The banks told RBI that this is not the right time for such a move. The RBI held a meeting with top bankers where their views on this sensitive issue were sought.

The chief of a bank, who attended the meeting said, “The savings bank interest rate acts as an anchor for other rates. One of the fallouts of deregulation would be that when there is a squeeze on liquidity, the rates could rise to the level of fixed deposit rates.” He added, “It will be a double whammy: there will neither be fixed deposits nor low-cost deposits.”

On Tuesday country’s top bankers, including ICICI Bank MD & CEO Chanda Kochhar, State Bank of India MD S K Bhattacharyya, HDFC Bank MD Aditya Puri and Standard Chartered Bank Regional CEO for India & South Asia Neeraj Swaroop will be meeting RBI Deputy Governor Subir Gokarn regarding this issue.

Another bank chief said, “Savings deposits are seen as a bank’s core deposits. They help us in asset-liability management. Most banks are of the view that it is too premature to deregulate the savings bank rate.”

A few months ago RBI had proposed the idea of freeing the savings bank rate. Recently Deputy Governor Usha Thorat had said, a working group will be set up to look into the possibility of deregulation. Thorat had said, “We have to examine whether the deregulation can help bring more people into the formal banking system."

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