Big banks block move to free savings rates

Big banks block move to free savings rates

At a time when interest rates are rising, some of the country's largest banks are trying to block a move to deregulate savings bank rate, fearing their cost would rise beyond 4% in a free market regime.
While the Indian Banks' Association (IBA) had opposed the move earlier, the issue came up for discussion again during the Reserve Bank of India's post monetary policy meeting with bank chiefs on Tuesday. The bankers, who are split between the larger and smaller players, took up the matter in the evening during theIBA management committee meeting.
Though banks are willing to borrow overnight funds from the RBI at 8%, they are threatening to increase service charges on basic banking services such as use of cheques and ATMs if savings rates are deregulated, which is seen as an acknowledgement of the fact that they are using savings bank balances as subsidized funds.
Besides, they are invoking the interests of smaller depositors to make a virtue of continuing with the regulated regime. For instance, a banker said that in a free market regime, those with say Rs 1 lakh or more in his savings bank account would get 6% along with freebies such as unlimited number of cheques.
But another person with Rs 50,000 to Rs 1 lakh would earn 5% and with a limited number of free cheques. At the other end would be someone who has Rs 10,000 in his savings bank and would earn 4% and would get only 10 free cheque leaves in a year.
Executives with some of the smaller and new banks, which have lower current account-savings bank account (Casa) balances, said if the savings bank rate was freed, they would immediately raise rates. While they concede that banks would pay more in the initial few months, things would settle down as the gap between fixed deposit rates and savings bank rate would shrink.
"That's the global experience. So, interest rates would be volatile only in the short run and in any case it would benefit depositors," said a bank executive.
At present,SBI pays 7% on term deposits with maturity up to 90 days, which translates into a difference of three percentage points with the savings bank rate. When it comes to a one-year fixed deposit, the difference is 375 basis points as the country's largest bank is offering 7.75% on such deposits. The story is similar across banks.
Bankers said the larger players fear that with new banks expected to come into the picture, the fight for savings bank balances is only going to intensify. "RBI should index the rates to inflation, which can help depositors earn more on their savings bank funds," said a banker.