Savings account rate deregulation is a proposal that has been discussed and debated for fairly long, formal consultations held, and now, finally, implemented. Undoubtedly, it is a welcome step.
In an environment where interest rates were deregulated long ago, there was no great reason why this one segment should have been kept regulated. If one had followed the debate and the voices of industry leaders on this proposal over the past many months, one can safely say that many of these views represented their own respective organisational interests rather than insights on systemic impact.
Varied reactions
Reactions to this current move by the RBI can be varied with some expecting fireworks — banks quickly weaning away customers and their accounts from those banks which are having significant low-cost, CASA deposit bases. Some others may expect competition leading to higher interest rate levels generally on savings accounts. While the former view presupposes that there are banks that will increase interest rates tactically while the competition would not do so, the latter view simply assumes banks getting into some kind of action-reaction cycle of rate increases.
Both views, needless to say, are simplistic. We have seen over the years, how the banking system has managed interest rate freedom both on the lending side and on fixed deposits. Expect method and not madness.
On the other hand, it is equally important to see the possibilities in terms of customer behaviour in response to bank initiatives. Price-sensitivity of savings account balances need to be understood better before safe conclusions can be drawn.
Retail deposit customers do shop around; they do have more than one banking relationship. But to expect all of them to dance to interest rate movements is myopic. If at all, there would be a small section of customers who may have such behaviour.
Even HNIs (high net worth individuals), who one can assume to be relatively more price-sensitive, today are managed by banks on an overall relationship experience basis.
There is also significant impact already made by banks' branding initiatives around segmented customer experiences.
Further, one must remember that this freedom is coming years after banks have established product and system capabilities for auto sweep-in and sweep-out between linked deposit accounts and for ease of unit-based, partial break of deposit accounts.
Another important dimension is that banks today have capabilities, in terms of data, process and systems, for extensive customer behavioural analytics based on which they can create combinations of product features, product pricing, transaction pricing and service standards, and view and manage customer relationship values.
Will there be interesting competitive action by banks using this new found pricing freedom? Yes, for sure.
Will it lead to immediate and significant shift of competitive balance among banks in this vital segment of business? Doubtful, and takes time.
Banking, particularly on the retail side, is no longer the business of money and its price alone, especially at a single product level. It is equally about service, the bouquet of products relevant for each customer and the overall service experience provided. Expect banks to handle their freedom in a mature way and expect customers to take their time to make up their minds.
(The author is a management consultant. The views are personal.)