Deregulation of savings bank deposit interest rates and effect of this policy

Deregulation of savings bank deposit interest rates

Though, banks are functioning in a deregulated environment, SB interest rate still continues to be regulated / administered by RBI.

The savings rate was fixed at 3.50% from March 2003 to May 2011.

Now Banks are free to determine their savings bank deposit interest rate, subject to the following two conditions:  1. First, each bank will have to offer a uniform interest rate on savings bank deposits up to Rs.1 lakh, irrespective of the amount in the account within this limit. 2. Second, for savings bank deposits over Rs.1 lakh, a bank may provide differential rates of interest, if it so chooses, subject to the  condition that banks will not  discriminate in the matter of interest paid on such deposits, between one deposit and another of similar amount, accepted on the same date, at any of its offices.

The above revised Guidelines would be applicable to savings bank deposits of resident Indians only.

In the past, when the interest rate on savings deposits was low and uniform across all banks,

The RBI's move to deregulate savings account interest rates has altered that cosy state of affairs forever Assumption that Rs.1 Lakh are constantly available in the firm  and interest rate is 4 %

Amount(Rs) Interest Rate(%pa) Interest Payment frequency Converted Interest rate for Quarter. Interest paid annually 1,00,000 4 Daily 4.0198 4,080

Banks would try to lure customers by offering higher interest rates along with other innovations and flexibility to get as many accounts as possible.

Most banks would want to maximize their CASA ratio as it provides funds at low cost. Before deregulation there was hardly any competition in this segment. But after deregulation, it is expected that banks would try to lure customers by offering higher interest rates along with other innovations and flexibility to get as many accounts as possible

Increased competition among banks might lead to an increase in the SB interest rate which would definitely have a bearing on cost of deposits, as SB interest rate is likely to go up by a minimum of 50 basis points.

In the deregulated environment, interest rates are not fixed anymore and hence there is also a possibility of downward revision of SB interest rate by Banks in the long run, which would be detrimental to the interests of small savers.

As time goes by, more and more banks will rationalize their savings account interest rates to follow the policy rates. In the end, this move by RBI will build a more efficient system for banks and a better choice for customers to bank their money.