Thursday, September 9, 2010

RBI seriously considering on deregulation of savings bank rates

The Reserve Bank of India (RBI) is seriously working on the possibilities of deregulating savings bank (SB) interest rate- the only regulated product in the banking sector. For this RBI is considering for setting up a working group on SB deregulation to have discussion on the issues and draw conclusions.

At present savings bank interest is set at 3.5 per cent by RBI. RBI deputy governor Usha Thorat informed that deregulation of savings bank interest "an issue which is on our radar". She said, "On one hand, the low cost savings accounts provide banks with low cost funds of an enduring nature which facilitate asset-liability mismatch and help lower lending rates. On the other hand, the costs not currently recovered in handling such accounts have to be considered as well." At the FICCI-Indian Banks Association conference she said, "Given the level of interest rates on bank deposits, common persons are lured by higher interest provided by alternate channels especially in the informal markets. Totally freeing rates could, in situations where there is virtual monopoly of banking, lead to lowering rates in some areas while leading to increase in other areas - it would need to be ensured that there is no discrimination between different customers of the same bank."

She added that transparency in cost recovery can help in deregulation of SB interest rate. For this non-discriminatory across location is also important. Above all, the main consideration should be whether deregulation of savings rates will help in bringing more people into the cover of formal banking system. She said, all these issues will be taken up in detail for discussion by the working group.

The RBI is also working on issuing guidelines on banks managing large private pools of capital. Recently banks have started investing in or setting up infrastructure funds or venture capital funds or even in private equity funds.

The RBI deputy governor pointed out, where a bank is directly or indirectly involved or floats/manages large private pools of capital, in such case additional capital requirements to take care of reputation, concentration and other risks not captured in the traditional framework , is needed.

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