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Economy
Interest Rates
Savings deposit rate deregulation: RBI discussion paper. In the discussion paper
released on Thursday on savings deposit rate deregulation, the RBI while maintaining a
balanced stance on the pros and cons, in our view, seemed to have a tone tilted slightly
towards a deregulated scenario. Admittedly, the paper is open for discussion and hence
does not offer any strong conclusion.
Pros and cons of deregulating the savings deposit rate
The positives highlighted by the RBI are:
�� Given the interest rate sensitivity of non-metropolitan areas, market-based interest rate may be
beneficial to the consumers. Larger savings can also be attracted from low-income households
�� The banks are also likely to be more focused on product innovation which will benefit
depositors
�� A significant part of aggregate deposits is in savings deposit (22%). Deregulation of the saving
rate could help in policy transmission as it is necessary for all rates to move in tandem with the
policy rates.
The negatives highlighted are:
�� Unhealthy competition may arise due to skewed pattern of CASA deposits among banks,
thereby raising the cost of funds of the banking sector
�� Banks treat a large part of their savings deposits as “core deposits” and use this together with
term deposits to increase their exposure to long-term loans, including infrastructure loans.
Deregulation of savings deposit rates can shift deposits from one bank to the other offering
higher rates. For banks with a large dependence of savings deposits for financing of long-term
assets, this, according to the discussion paper, could pose risks of asset-liability mismanagement.
�� May lead to financial exclusion as higher cost of deposits is likely to discourage banks from
maintaining savings deposits with small amounts.
Tone seems a little biased towards deregulation
The paper notes that analysis of interest rates on term deposits shows that there was not any
unhealthy competition among banks. It expects that the same would hold for savings rate
deregulation. In terms of shifting of deposits from some banks, the paper notes that there had
been only a marginal shift from public sector and foreign banks to private sector banks. Hence the
chances of a shift in savings deposits are also likely to be considerably lower. While debating the
concerns that a deregulated environment will lead banks to issuing features which may actually be
adverse for small savers, the paper advises that this issue can be solved through policies and
regulations rather than interest rate regulation. Summing-up, the paper notes, “Savings deposit
interest rate cannot be regulated for all times to come when all other interest rates have already
been deregulated as it creates distortions in the system. Most countries in Asia experimented with
interest rate deregulation to support overall development and growth policies. These resulted in
positive real interest rates, which in turn contributed to an increase in financial savings.
Deregulation of savings bank deposit interest rate also led to product innovations.”
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Economy
Interest Rates
Savings deposit rate deregulation: RBI discussion paper. In the discussion paper
released on Thursday on savings deposit rate deregulation, the RBI while maintaining a
balanced stance on the pros and cons, in our view, seemed to have a tone tilted slightly
towards a deregulated scenario. Admittedly, the paper is open for discussion and hence
does not offer any strong conclusion.
Pros and cons of deregulating the savings deposit rate
The positives highlighted by the RBI are:
�� Given the interest rate sensitivity of non-metropolitan areas, market-based interest rate may be
beneficial to the consumers. Larger savings can also be attracted from low-income households
�� The banks are also likely to be more focused on product innovation which will benefit
depositors
�� A significant part of aggregate deposits is in savings deposit (22%). Deregulation of the saving
rate could help in policy transmission as it is necessary for all rates to move in tandem with the
policy rates.
The negatives highlighted are:
�� Unhealthy competition may arise due to skewed pattern of CASA deposits among banks,
thereby raising the cost of funds of the banking sector
�� Banks treat a large part of their savings deposits as “core deposits” and use this together with
term deposits to increase their exposure to long-term loans, including infrastructure loans.
Deregulation of savings deposit rates can shift deposits from one bank to the other offering
higher rates. For banks with a large dependence of savings deposits for financing of long-term
assets, this, according to the discussion paper, could pose risks of asset-liability mismanagement.
�� May lead to financial exclusion as higher cost of deposits is likely to discourage banks from
maintaining savings deposits with small amounts.
Tone seems a little biased towards deregulation
The paper notes that analysis of interest rates on term deposits shows that there was not any
unhealthy competition among banks. It expects that the same would hold for savings rate
deregulation. In terms of shifting of deposits from some banks, the paper notes that there had
been only a marginal shift from public sector and foreign banks to private sector banks. Hence the
chances of a shift in savings deposits are also likely to be considerably lower. While debating the
concerns that a deregulated environment will lead banks to issuing features which may actually be
adverse for small savers, the paper advises that this issue can be solved through policies and
regulations rather than interest rate regulation. Summing-up, the paper notes, “Savings deposit
interest rate cannot be regulated for all times to come when all other interest rates have already
been deregulated as it creates distortions in the system. Most countries in Asia experimented with
interest rate deregulation to support overall development and growth policies. These resulted in
positive real interest rates, which in turn contributed to an increase in financial savings.
Deregulation of savings bank deposit interest rate also led to product innovations.”
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