Cartelising savings bank rate?

The savings bank deposit interest rate is reportedly on the Competition Commission of India’s (CCI) scanner.

In November 2011, the Reserve Bank of India (RBI) deregulated the savings bank deposit rate. Five small private sector banks and ten small foreign banks offered higher rates than the erstwhile regulated rate. But all public sector banks and the large private and foreign banks continued to adhere to the erstwhile regulated rate of 4 per cent. The question is whether these banks have cartelised the savings bank rate.

When term deposit interest rates were freed 15 years ago, the RBI continued regulating the savings bank deposit rate as a signalling rate; this became redundant with the evolution of the repo rate as the policy rate.

The Indian Banks’ Association (IBA) was against the deregulation of the savings bank deposit rate, as major banks warned of an apocalypse if the rate was deregulated. The market leaders have been able to keep the flock together and adhered to the 4 per cent savings bank deposit rate, and banks which broke away from the monolith are inconsequential to the system.

When the term deposit rates were freed, each bank fixed its own structure of rates, taking into account its cost of funds and return on funds. In contrast, in the present situation, all the public sector banks and the large private and foreign banks have toed the 4 per cent rate line.

Significance of CASA

The proportion of current and savings accounts (CASA) in total deposit is the key determinant of the cost of funds, and thereby the competitiveness of a bank. Some banks such as SBI, HDFC Bank and ICICI Banks have CASAs of 40 per cent or more.

In contrast, some of the small private and foreign banks have low CASAs, as low as 10 per cent. These small banks had little to lose by offering higher savings bank rates.

For instance, Yes Bank, which had a very low CASA, offered 7 per cent on savings bank deposits and improved its CASA, and thereby increased its net interest margin (NIM).

Discriminating customers

It is not as if all savings bank account holders get 4 per cent on their deposits. Banks have ingenious means of rewarding select customers with higher effective rates of interest.

Depositors with large balances are enticed with facilities like sweeping accounts and multiple option deposits which offer much higher rates of return than savings bank deposits with easy liquidity. Yet another technique is to encourage depositors to convert to longer-term deposits with the assurance of no penalty for early withdrawal.

Big Daddy, SBI, has beaten them all by offering as much as 7.5 per cent for a 7-day deposit, with an automatic rollover facility without loss of interest on withdrawal at any time. In effect, the SBI is able to offer very high rates for short-term funds while most banks offer 4 per cent to savings bank customers.

The iniquity of this approach is that smaller depositors get a rate of 4 per cent while the larger depositors get much higher rates. It is unlikely that even in the case of SBI, depositors in, say, Dichpalli, in Nizamabad District, Andhra Pradesh, are provided higher interest bearing facilities. Likewise, even in metropolitan and urban areas, small depositors will get only 4 per cent.

Is this Cartelisation?

Does the bulk of savings bank depositors being paid a uniform rate of 4 per cent by all public sector banks and the large private and foreign banks tantamount to cartelisation?

These banks could rightly claim that there is no written agreement or IBA-directed ruling that makes banks adhere to the 4 per cent rate on savings bank deposits.

To be deemed to be running a cartel, there is no requirement that there should be a written agreement. It would suffice if circumstantial evidence points to cartelisation. If this rate was not cartelised, like term deposits, there would have been some variation in the Savings Bank deposit rate of each bank.

All banks offering the 4 per cent rate on savings bank deposits do not have high CASAs and banks with a low CASA would gain significantly in terms of their NIM if they were to offer higher rates on savings bank deposits.

The fact is that the small/medium sized banks are afraid that the market leaders could unleash retaliation to ensure that banks do not stray out of the flock.

CCI Versus RBI

In an ideal situation, the industry regulator (RBI) should first intervene and only if the issue is unresolved, the Competition Commission should intervene. In the present situation, the RBI is aware of the ground realities. If it felt that there were signs of cartelisation, it should have used strong moral suasion to ensure that banks do not cartelise.

Its silence could indicate that the RBI does not see this as a case of cartelisation. It is not clear whether the CCI has issued a notice to banks. Even in the absence of a formal notice by the CCI, this should be a wake-up call to the RBI and alarm bells should be ringing for banks.

It is time the regulator and the banks realise that the present situation is against the best interests of the mass of depositors.

The All-India Bank Depositors’ Association should actively take up the issue.

(The author is an economist. >blfeedback@thehindu.co.in )

COMMENT NOW