Deregulation of Savings Bank Deposit Interest Rate - Who is the real gainer?

RBI has deregulated the savings bank deposit rates in its last monetary policy in order to promote better competition between the banks. This article would analyze whether this projection of RBI is really acceptable and what are the other favourable and unfavourable side effect of this policy. A brief Indian history can be remembered in this regard. In early 90s, the then government has de-regularized all the key policy rates as a part of its’ financial reform process. However, savings bank deposit rate were kept out of the purview and the rate remain at 3.5%%-4% p.a. since March 2003. After implementation of the policy, there will be no cap on the interest rate and every commercial bank can declare savings deposit rate at their own discretion. In the next segment of the article, we would try to find out what are the practical merits and demerits of this de-regulation process of savings bank deposit rate.

It is well proven from the past that whenever, competitive pricing of the product hits the market, benefit of the consumer magnified. No wonder, this time also, savings account holder will get the maximum benefit from this policy decision due to existence of some top class private players in this banking segment. However, it is noteworthy here that consumer having more idle money in savings account will get more interest as because the banks has to offer uniform savings Bank deposit rate up to balance of Rs.1,00,000. So, if your SB account balance is more than one lakh, you will enjoy the higher interest rate otherwise you have to accumulate all your money in a single bank account so that it crosses one lakh. Being pro-active to the change, Yes Bank has already increases its SB rate by 200 bps (6%). However, if you are able to compromise with liquidity, it is still beneficial to put your money in FD or Mutual Fund.

We are actually expecting to see lot of product innovation in this savings deposit instrument due to this policy change. Cross country de-regulation of savings bank deposit rate has proven track record of product innovation. In 2001, de-regulation of SB interest rate in Hong Kong results emergence of HIBOR linked savings products and hybrid savings deposit account which is a combination of current account and term deposit account.

Having said that, consumer will surely benefit from this arrangement, higher deposit rate will increase overall cost of deposit of the bank. It will have two possible effects. If banks want to pass on the effect of increase in deposit rates to the borrower, lending rate will shore up and GDP will be affected. On the contrary, if the banks do not pass on the burden to the lender, margin of the banks will be affected. Under these circumstances, private sector banks will reap the benefit due to their good quality credit. Public sector banks will be very reluctant increase the deposit interest because of their huge increase of cost of deposit and poor NPA management. For obvious reason, we will see a clear shift of deposit from public sector banks to private sector banks having low cost of deposits. Therefore, an unhealthy competition between the public and private sector bank is inevitable. Therefore, as an investor, we have to cautiously monitor bank’s decision on SB deposit rates because it will have direct effect on bank’s margin. One may argue, whether this is the first step towards privatization of banking sector. Well, it is too early to comment on that.

Public sector banks have more reason to worry. Presently, a considerable part of CASA deposit which is in the nature of core “deposit”, used by the banks for increasing their term loan exposure. SBI and its associates have the highest percentage (more than 50%) of term loan out of its total advance. If CASA deposits started to shift from public sector banks to private sector banks, a huge asset-liability mismatch is inevitable for the public sector banks. As a result, public sector banks will be forced to squeeze their exposure in term loan.

Having said that consumer will be benefitted largely, we have to remember, allied charges for operating savings account will definitely increase for customers having small deposits because of increase in cost of deposit. However, whether this decision will increase healthy competition between the banks is really questionable. In spite of that we have to acknowledge that before de-regulation of other key policy rates at early 90s, we have never anticipated that the then decision will make our country globally superior within 20 years. For now, we can only hope for the best. Our market players and consumers have enough strength to absorb the shock which makes our country so special and unique.