The Hindu Business Line : PSBs oppose deregulation of savings bank rates

Public sector banks have opposed deregulation of savings bank (SB) deposit rates and instead preferred the continuance of the current administered rate mechanism.

Banking sources said that almost all the new generation private sector banks and foreign banks have sought complete deregulation of SB rates.

A section of the public sector bankers said that deregulation of the SB deposit rate would lead to excessive volatility in both deposit and lending rates.

At present, SB deposits account for a major pool of long-term funds for the public sector banking system. The SB deposit base of public sector banks is estimated at Rs 7 lakh crore or 40 per cent of the aggregate deposits.

This was in view of the large number of accounts and the minimum balances that are maintained in these accounts.

Working funds

Above all, the SB deposits are a low-cost source of long-term working funds. In fact, the banks with a large pool of SB deposits currently have an average workings funds cost of barely 5.5-6 per cent.

Bankers said that they had managed to contain the costs at these levels despite the rise in interest rates during the last few months.

The private sector banks, the sources said, had sought the increase in view of their higher cost of working funds. Compared to public sector banks, the average cost of working funds for new generation private sector banks was at least 50 to 100 basis points higher than the public sector.

Instead, the private sector banks have less of this kind of a pool of long-term resources. Deregulation of the rates, the bankers said, was therefore intended to allow the private sector to push up deposit rates substantially, a move that could also trigger an increase in lending rates.

Besides, bankers said, that any deregulations would lead to an acceleration of flight of bank funds to other sectors. So far, disintermediation of banks was confined only to metro regions in the country. But this has now extended to class two cities and in some of the States, disintermediation has reached even the rural areas.

The sources said that instead of deregulations and subjecting the SB rates to volatility, there was a case of raising the rates marginally. Such a step would also result in pushing up the floor rates. SB rates currently act as a floor for deposit rates and have not been revised since 2003. This step would also ensure that disintermediation of bank funds is halted, the bankers added.