The Reserve Bank of India seems to have set the cat among the pigeons insofar as the nationalised banks are concerned, with its decision to allow commercial banks to pay pretty much as they please — the rate of interest on savings bank accounts.

This is a retreat from the current dirigisme of fixed and uniform interest rate across the board, but in step with its earlier move to free the interest rates on term deposits. A hint of what was coming was given when the RBI not long ago increased the savings interest rate from 3.5 per cent to 4 per cent , but the abrupt dismantling of control seems to have caught the public sector banks on the wrong foot.

YES Bank, a private sector upstart, threw the gauntlet at the dominant public sector banks by hiking the savings interest rate to 6 per cent within a couple of hours of the announcement by the RBI to free the interest rates, and since then a couple of others have followed suit. For a small private sector bank to entice depositors with heightened interest is no big deal for two reasons: relatively small existing savings deposits base vis-à-vis that of say the gargantuan SBI and the real possibility of weaning away money from the more expensive fixed deposit accounts to savings accounts.

But SBI with its huge savings deposit base that has been the envy of the private sector banks simply cannot afford to be blasé about the whole thing. Even a percentage hike could spell a heightened charge against profits. Which is why it is taking its time in announcing its riposte to the challenge.

Out of the box thinking

The RBI has mandated that a bank while being free to pay whatever interest it pleases, must pay the same rate across the board to everyone on savings deposits up to Rs 1 lakh per account. In other words, there is considerable scope for bringing constructive creativity into play after crossing the Rubicon. For example, a bank may woo High Net Worth Individuals (HNIs) with a differential higher interest of 5.5 per cent on deposits in excess of Rs 1 lakh so long as the excess is not less than say Rs 4 lakh for a specified time or for all times vis-à-vis the interest of say of 4.75 per cent on deposits up to Rs 1 lakh.

Indeed, it can entice large deposits, which incidentally would also enable it to overcome the nightmarish Asset-Liability Mismatch (ALM) problem that often haunts the bankers, with a sliding scale of interest that goes up say 25 basis points with every additional Rs 5 lakh of deposits. And interest alone need not be the sole weapon of banks to woo depositors.

WIN-WIN

State Bank of India, with its in-house insurance outfit, can draw a plan of deposit insurance to provide cover for the entire deposit, against the extant cover on just Rs 1 lakh of savings deposits provided by the state-owned Deposits Insurance Corporation. This would be a win-win situation for indeed all the Bancassurance companies. There are depositors who value safety above returns beyond a degree, and the best way to reassure them is with deposit insurance. Banks can then play on the vulnerabilities of such prudent if paranoid depositors.

Another effective tool could be concessional interest for saving deposit holders holding beyond a specified threshold, say Rs 10 lakh on loans up to a matching amount, i.e. Rs 10 lakh in this example on hand.

Wily depositors too can wangle for themselves the best deal possible by dangling the alluring prospect of placing extra large sums as savings deposit in return for not only differential higher interest, but also for a host of services like free collection of cheques/warrants/drafts at their doorsteps and utility payments on presentation of bills without bothering the account holder with cost and without intruding on their time.

Drafts may be gotten made similarly at no cost. Untrammelled access to bank's own ATMs could be another bait to hook customers who hate hassles. Right now, banks have varying limits for withdrawal during a day ranging from Rs 15,000-25,000. The list could go on.

Banks, be they private sector or public sector, cannot be too liberal with interest rates if that threatens to blur the interest differential between term deposits and savings deposits and cut into the term deposits that are always more prized by them.

To wit, if the six-month term deposit rate is 6.5 per cent and the savings rate is 6 per cent , there might be a wholesale shift from such term deposit account to saving account, given the fact that savings accounts lend themselves to greater flexibility and interest is not subject to tax deduction at source.

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

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Published on January 1, 2012