Bankers say no to RBI on savings rate deregulation

Banks are putting up stiff resistance to Reserve Bank of India’s (RBI’s) move to deregulate the interest rate on savings bank accounts — the last bastion of administered rates. Banks benefit from low-cost savings deposits. The central bank wants to free the savings deposit rate to smoothen monetary policy transmission, which it feels is hampered by the current fixed-rate regime.

At 3.5 per cent a year, interest on savings accounts is the only remaining regulated rate in the banking system — and a highly contentious one, given its impact on the common man. However, banks fear that making this low-cost product market-driven will only create instability.

As a result, banks have told RBI that the time is not ripe for such a move. The central bank had called a meeting of top bankers where their views on this sensitive issue had been sought.

“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,” said the chief of a bank, who attended the meeting.

“It will be a double whammy: there will neither be fixed deposits nor low-cost deposits,” he added.

The 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 meet with RBI Deputy Governor Subir Gokarn on Tuesday.

“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,” said another bank chief.

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