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Dr C. Rangarajan (left), Chairman, Economic Advisory Council to the Prime Minister, and Mr T.S. Narayanasami, Chairman and Managing Director, IOB, at a conference in Chennai on Friday. — Bijoy Ghosh

Chennai , Sept. 23

THERE is a case for a slight hike in interest rates on deposits while reducing the rate on small savings, according to Dr C. Rangarajan, Chairman, Economic Advisory Council to the Prime Minister.

Referring to the concern on the slow down of growth in deposits in banks and a slow down in household savings in financial assets, he said some attention has to be paid to the rate of interest offered on deposits. The real rate of interest after adjusting for inflation is not positive.

Also, there are competing instruments such as small savings that prescribe higher rates. This has resulted in a fractured and misaligned structure of interest rates.

Addressing the Indian Overseas Bank Officers' Association's triennial conference here today, he said that with the concern about the increased flow of small savings, State Governments must reduce the incentives offered on small savings, he said.

This is also the appropriate time for the deregulation of interest rate on the savings accounts in commercial banks. The present practice of calculating interest on the minimum balance between the 10th and the end of the month is not depositor friendly, he said.

The monetary policy statement in April 2005 referred to this but did not take a position. The upward adjustment in deposit rates need not result in an increase in lending rates, as the banks should be able to absorb it through efficiency gain, Dr Rangarajan said.

During 2004-05 aggregate deposits of scheduled commercial banks increased by 12.8 per cent, net of conversion of IDBI into a bank, as compared with 17.5 per cent in 2003-04. Savings in financial assets as a proportion of GDP at current market prices came down to 9.9 per cent from 11.4 per cent in the previous financial year.

Banks must focus more on customer service; and ensure that sectoral deployment of credit keeps pace with the economic change. The service sector accounts for nearly half the GDP, the external sector constitutes 25 per cent of the GDP and to sustain growth large investments will be needed in infrastructure.

But there is also need to expand credit to agricultural and allied activities that support the bulk of the population. Agriculture should not be treated as a single market. Special attention is needed for the small and marginal farmers. Providing credit to high-tech agriculture is no different from providing credit to industry and banks should have no hesitation to fund surplus farmers.

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