A bank’s operational performance depends on it ability to get low cost deposits and to lend it to borrowers at a higher rate. Banks typically mobilize the funds from the public using various types of deposits like Current accounts, savings accounts, Fixed deposit accounts etc; Among these, the most favorite for the banks is Savings account because not only the interest rate is lower but also indirect costs are lesser as well when compared to other type of accounts.
While the banks gain because they are able to source funds at a lower cost (currently at 3.5% p.a), it is the depositors who lose in the end. This is because at 3.5% p.a the savings bank account interest rates are much lesser than the rate of inflation, obviously decreasing the value of the money. RBI, while deregulating the interest rates for fixed deposits at a particular range, has so far not come forward to deregulate the interest rates for savings bank account. De-regulating means that the banks are free to fix their own rates with respect to a bank account, for e.g: Banks now independently fix interest rates on Fixed deposit rates within the RBI guidelines.
What will happen if the RBI decides to deregulate the savings account interest rate?
- Depositors will get more value for the money as banks, both public and private, look forward to attract depositors for low cost savings accounts. The interest rate for SB accounts, therefore, may rise a few percentage points. For example, the banks may offer a better rate of 5-6% per annum.
- Banks will see an increase in their interest expenses since interest rates will be increased on account of deregulation of savings bank account. This is because the competition between banks in securing low cost deposits will only grow stronger with an average depositor will maintain a savings account with the banks that offer high value for his money. The rise in interest rates may affect the financials of banks.
- At times, when the stock markets are performing badly and investors withdrawing their investments and moving on to safer investments, they may consider parking the money in their savings bank account till the situation improves. This is because the savings account will not only offer a higher interest rate but also a guaranteed return at tougher times. People may prefer parking their money in savings bank account rather than in a short term Fixed deposit because they can withdraw money from their savings account hazzle free.
Experts are expecting that the RBI may propose to deregulate savings account interest rates to remove the skewed benefits that the bankers enjoy at the expense of the depositors.
The author, CWA Srinivas K, is a Coach for CA/CWA/ACS and also a tax consultant. He can be reached on email@example.com