Deregulating savings bank rates

In its discussion paper on deregulating savings bank interest rates, the Reserve Bank of India (RBI) has invited public opinion on certain key issues — whether the rat race triggered by a free regime would result in Asset-Liability Mismatch (ALM), a bankers' nightmare, whether and how it would adequately address the concerns of the vulnerable segments of the society such as senior citizens, pensioners, rural folks and so on and whether higher rates should be a bait for disowning the cheque book facility.

While all these issues are no doubt important, there are other imponderables as well.

The country's largest bank, State Bank of India (SBI) boasts of a sizeable savings account base, by far the cheapest source of finance for banks. There is a perception especially among the lay-folks that SBI by far offers the most competitive rates for borrowings and private sector banks fleece the borrowers. This is not entirely true.

Wrong perception

The true indicator is the spread, the difference between the average cost of funds and the average interest rate charged from borrowers. Intuitively, it is likely to be much the same for all banks given the intense competition.

For example, if the average cost of funds for SBI is say 5 per cent as against say 8 per cent for HDFC Bank and their average interest rates are 11 per cent and 14 per cent respectively, both end up with a spread of 6 per cent and thus it would be wrong to brand the latter as more avaricious. For all one knows there may be a marked shift, if not flight, of savings deposits from the staid and laidback public sector banks to the private ones known for their quick and courteous service.

When neither the term deposit rates nor the borrowing rates are regulated by the RBI, naturally one wonders why the savings bank interest rates alone should be regulated Some of the private sector banks have shrugged off the whole debate as inconsequential because for them fee-based income is becoming the money spinner, rather than the interest-based income. Their preference for big-ticket customers is understandable given the administrative costs involved in servicing thousands of smallsavings accounts, but they may not be averse to getting a slice of the savings bank pie hitherto cornered by old banks, mainly in the public sector. When a product or service is regulated, it remains a vanilla product or service with very little scope for differentiation. Therefore when it is deregulated, differentiation should follow automatically and axiomatically.

Carrot and stick policy

Thus banks must be allowed to dangle carrot and stick. Those maintaining a large average balance of say Rs 50,000 during the year should be allowed to earn a higher rate of interest and those who use the account essentially as an expense account leaving very little balance should be paid a lower rate of interest. And those forsaking the cheque book facility should be rewarded more. There can be a ceiling on the maximum number of withdrawals and cheques issued during a given period of time at the pain of lower rate of interest. The innovative aspects should be left to the individual banks subject to some overall guidelines in the interests of small depositors.

Lest the fear of fresh compliance with KYC norms holds back an account holder from switching , it must be mandated that KYC certification should be fungible; an appraisal done by one bank should be valid when an account is opened with another bank till the time comes for reappraisal. Individual banks vying for customers would design special features for the vulnerable sections.

Exaggerated fear

The fear of a possible heightened ALM threat seems exaggerated. The extant cash reserve ratio and SLR norms more than take care of the adverse effects of the possible mismatch due togreater amounts flowing into the savings account. . The difference between term deposit rates and savings rate would be substantial enough even in the post- deregulation era as not to erase the line of distinction between the two.

(The author is a Delhi-based chartered accountant.)

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