The Reserve Bank of India has been toying with the idea of deregulating savings bank (SB) interest rate for quite some time and accordingly, released a discussion paper inviting comments from public.

The SB deposit rate, which continues to be under regulation, has been enhanced from 3.5 per cent to 4 per cent in the Credit Policy announced on May 3.

SB accounts are basically maintained and operated more by the middle-class and lower middle-class people. A majority of the people from rural semi-urban and urban segments perhaps maintain only SB accounts as a matter of convenience and thrift habit.

Salaried class, senior citizens, pensioners and small savers maintain SB accounts and keep heavy balances according to their standards. Even among them, the slightly better off and highly literate maintain only very minimum balances in SB accounts as they prefer to save in other instruments such as recurring deposits, fixed deposits, equity shares, bonds real estate and commodities.

Minimum balances

Many of the banks, particularly the new generation and foreign banks, insist on minimum balances of comparatively high order and high net worth individual's business class people prefer to maintain their accounts with these banks as status symbol and for personalised attention.

Foreign banks have a knack of avoiding ordinary people from opening SB accounts by keeping the minimum balances beyond the reach of even some of the upper middle-class people by Indian standards. Their service charges are also beyond affordability for many.

Public sector banks and old generation private sector banks allow people to open SB accounts with very minimum balance and this is a boon to many particularly to those who belong to lower strata of the society.

With the invasion of ATM cards basically linked to SB accounts, the operations in the SB accounts have become convenient and user friendly. With Internet and mobile banking facility, highly educated well employed and high net worth class of people keep SB accounts and maintain very high balances.

Majority of senior citizens, pensioners and a large segment of people belonging to pre-reforms period, in particular, continue to have banking with old generation private sector banks and public sector banks out of sentimental value and because of mental block to switch over to modern technology related banking.

From banks' point of view

With the demat accounts made compulsory for investments purposes, most of the banks have linked SB accounts with demat accounts. Individuals having investments in capital market which form only an insignificant portion of over all investors, maintain such demat-linked SB accounts keeping relatively very high balances. Deregulation of such SB accounts' interest rate is highly desirable.

There are different categories of banks operating in the system and the SB accounts with them have different backgrounds. There are local area banks, regional rural banks, cooperative banks, old generation private sector banks, new generation private sector banks, foreign banks, nationalised banks and state bank group.

There is no level-playing field among various bank groups as far as deposit mobilisation is concerned. The only uniformity among these bank groups is in the matter of SB interest rate.

Deregulation of the SB rate can adversely affect some of the bank groups which thrive on SB deposits and take care of the so-called financial inclusion which unfortunately have not taken off well despite all efforts both from the RBI and the Government.

How some of the bank groups deliberately skip financial inclusion is well-known and deregulation of SB interest rate will further facilitate them to exclude financial inclusion right royally.

The local area banks are very few in numbers and they survive basically with SB deposits. Financial inclusion which is very essential and talked about loudly can be possible only if such banks are encouraged and supported by the RBI. These banks though operate in rural areas are also high tech banks and perform comparatively well in reaching out to the poor and needy. Regional Rural Banks enjoy a very large share of SB deposits from poor farmers, retailers and small business operators.

The SB bank deposits of these banks are from poor masses and they deserve better rate of interest if possible linked to inflation trend. Willy-nilly deregulation somehow encourages greed and this would affect the morale of the masses and only lead to exploitation of the masses.

Small savers need protection of their interest income. The economy has not matured enough and exploitation has been the undesirable trend. Maximise profit at any cost even at the cost of the poor people has been the trend and this can be cited in a way as one of the reasons for high inflation. This ground reality cannot be ignored while deregulating SB interest rate.

Old generation private sector banks continue to enjoy the loyalty and support of large segment of customers. Their business operations have some unique characteristics because of their regional base and they extend personalised service for their deposit customers. Deregulation of interest rate can result in undercutting among these banks and it may result in the shift of deposits from one bank to another resulting in the Asset-Liability mismatch and also increase in the cost of operations.

They have gold loans and advances against deposits having linkages with SB deposits. Their clientele except perhaps in urban and metropolitan centres prefer to have the transactions personally in the branch premises and do not use the ATM cards even if they hold the cards. For such banks, the disturbance on the deregulation of interest rate of SB account would be rather high and adjustment would take a long time.

High tech banks

New generation private sector banks and foreign banks are high tech banks and the deposit customers are also equally high tech when compared to other banks' customers. Their staff also belongs to the post reforms period and their banking knowledge and practices differ vastly from old private sector banks and even from public sector banks. They have a distinct advantage over other banks in adopting new reforms in terms of cost, technology, manpower and clientele understanding. They will welcome the deregulation of interest rate on SB account as they thrive on competition and maximisation of profit. They have no other consideration other than profit and deregulation of interest will be an opportunity for these banks to further showcase their competitiveness, particularly before some of the public sector banks.

Public sector banks, which enjoy the backing of the Government in guaranteeing the safety of depositors' funds, have maximum deposits in SB accounts. In case, the SB rate of interest rate is deregulated, they will be the worst sufferers. All PSBs cannot compete with private sector banks and many will lose their share of deposits in case rate offered by the private sector banks turns out to be higher than what they offer.

If they have to offer higher rate of interest to maintain their share of SB deposits, it may adversely affect their bottomlines and the Government will have to ultimately bear the cost. The deregulation cost will finally have to be borne by the Government and other stakeholders. This will also derail the financial inclusion programme of the Government and the RBI as PSBs may not be keen to go in for small deposit accounts.

Further, deregulation will have more asset liability mismatch in PSBs than in other banks because of their larger share of SB accounts and presumably bigger share of infrastructure loans extended based on the permanent / core share of SB deposits.

Co-operative banks have a sizeable SB deposits and if interest rate is deregulated it may even sound the death knell for the entire cooperative system which is already under stress.

Options for Deregulation

Though deregulation is desirable and may be necessary to make the monetary policy transmission more effective as claimed by the Reserve Bank, this can wait for some more years till the economy matures and depositors understand the nuances of finance and its implications.

As it is, only a very few percentage of the depositors understand the full implications of deregulation and the possibility and capability of the system taking the depositors for a ride because of greed for profit, general laxity in corporate governance in protecting the interests of the masses and the visible tendency to exploit any situation (even if the deregulation is well intended) through corruption and other malpractices taking advantage of the ignorance of the masses cannot be ignored.

The expectation that deregulation will increase the cost of funds which is already ruling high is also not very conducive for the present.

The ideal time for deregulation would be when the inflation is low, economic growth is good, and the average cost of funds in the economy is at a reasonable level.

No doubt SB interest rate deregulation has its advantages and is welcome in the overall interests of the economy in general and banking system in particular, the timing and approach need to be well calibrated. Partial deregulation in a phased manner can be initially attempted.

Banks which have kept very high level of minimum deposits for SB accounts and have linked the deposit accounts to ATM, Internet and mobile banking and demat accounts can consider deregulating the deposit interest rate and their operations need to be closely monitored by the RBI.

SB accounts maintained by institutions such as charities, trusts, clubs, associations, and NGOsin any bank can also be deregulated. The RBI can also consider keeping a ceiling say Rs 1 lakh for SB accounts. Any amount exceeding Rs 1 lakh should move to either current account or FD account. Interest rate on SB accounts should have a bearing on the inflation and should be periodically revised. SB accounts should be only for individuals.

Surging inflation

The economy is in the grip of high inflation. The cost of deposits and the cost of funds are already very high. In case of deregulation of SB deposit interest rate, the immediate reaction would be to hike the interest rate further beyond the 4 per cent already effected.

Since the NIM is beyond three per cent and banks are reluctant to bring it down, the possibility of banks enhancing service charges to recover the additional interest expenditure cannot be ruled out. Financial inclusion is far from satisfactory. In such a scenario, the timing for deregulation does not seem to be very appropriate.

(The author is a consultant. The views are personal)

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