A strange savings instrument

A simple reform measure has been doing the rounds of debate for quite a while — the freeing of interest rates on savings bank deposits (SBDs) and suitably rationalising these accounts.

Introduced essentially as an instrument for inculcating the savings habit and spreading the banking outreach, SBDs now account for a major chunk of total deposits, with diversified ownership. However, the way in which SBD accounts are structured in India makes them akin to current accounts. For instance, SBDs elsewhere do not generally allow cheque-writing facilities.

Indian banks treat current and savings deposits (CASA) as a base to be exploited for reducing the cost of funds. Commercial banks compete with one another to strengthen the CASA base, as part of aggressive liability management. The RBI Deputy Governor, Dr K.C. Chakraborty, in a recent interview, remarked that CASA was peculiar to our country. The norm the world over is only retail deposits with free and mostly floating interest rates.

PSU BANKS' APPREHENSIONS

The deregulation of interest rate on SBDs has been opposed on the ground that it would deprive public sector banks of a major source of low-cost funds. This, in turn, is rooted in the assumption that the freedom to set the SBD rate might lead to a rate war, causing an erosion of the deposit base of public sector banks in favour of private sector and foreign banks.

In terms of both number of accounts and value (Table 1), the public sector accounts for about 75 per cent, private sector about 10-15 per cent and the foreign banks a meagre 1-3 per cent. Therefore, the belief that the CASA base of the public sector will be shaken because of the rate war seems ill-founded. Overall, the safety factor favours the public sector. In spite of lower rates, public sector banks should be in a position to retain their deposit base.

The annual policy announced on April 29, 2002, considered liberalisation of the savings bank deposit rate, but decided to continue with the administered structure.

To quote: “In view of the present deregulated interest rate environment and the reduction in interest rates on Government's small savings schemes in the recent period, there is an apparent case for deregulation of interest rates on savings account also. However, considering the fact that bulk of such savings deposits is held by households, including households in rural and semi-urban areas, on balance, it is not considered as opportune time to deregulate the interest rate on savings account for the present.”

WHO OWNS SBDs

The ownership pattern of SBDs in terms of deposit amounts (Table 2) shows that though the household sector held about 84 per cent, farmers and wage earners together accounted only for about 22 per cent of the ownership, while business-persons and the non-household sector accounted for the rest.

While the government sector and foreign sector accounted for about 15 per cent, a somewhat nebulous category, ‘other individuals', within the household sector accounted for about 44 per cent. The incentive for such a diversified ownership apparently does not come from the ‘savings habit', but obviously because of the accountholders' ability to write cheques on these accounts.

If the cheque-writing facility is allowed only in respect of current accounts, a substantial part of SBD amounts can be expected to migrate to current accounts. In that circumstance, it is most likely that the cost of CASA will turn out to be more beneficial to the banking system.

CHEQUE-WRITING FACILITY

The basic difficulty with the SBD is its dual nature of being a savings account, combining the features of a cheque-writing account. To promote the savings habit, especially among relatively low-income groups, the cheque-writing facility in these accounts may be withdrawn.

Savings bank deposits, as in other countries, could offer minimum facilities such as withdrawal and ATM/debit card with modest interest payment. SBDs may, in principle, be treated on par with ‘no frills' accounts. There need not be a distinction between savings deposits and ‘no frills' accounts. Interest rate on such accounts may be totally freed.

Opening of savings accounts may be allowed only to individuals and households , and all other categories of account-holders, including government organisations, trusts, non-banking organisations, etc., should be encouraged to open current accounts. Post-office savings accounts, which are similar in purpose to savings deposits of commercial banks, now carry the same rate of interest as commercial bank deposits, but the eligibility for opening accounts is restricted mainly to individuals.

(The author is Director, EPW Research Foundation. The views are personal.)

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