Deregulation of savings bank interest rates: RBI’s move not practical in the present scenario

Giving freedom to banks to fix their own interest rates on saving bank deposits in the present juncture may create more problems for the common man, who may have to face higher service charges and more restrictive practices

The Reserve Bank of India (RBI) has always been known to be like a proverbial mother-in-law, who would not like to pass on the baton to the daughter-in-law in one go, but empower the latter only in small bits and pieces. Because either the RBI does not wish to give away power easily to the banks to decide what is best for them, or does not feel confident that the banks have come of age to take their own decisions.

The present announcement to deregulate savings bank deposit rates is coupled with two conditions, which only show that when the RBI gives up its powers, it does not do so wholeheartedly, but with reservations, despite having all the powers at its command to penalise recalcitrant banks.

The policy announcement firstly says that each bank will have to offer a uniform interest rate on savings bank deposits up to Rs1 lakh, irrespective of the amount in the account within this limit. Secondly, for savings bank deposits over Rs1 lakh, a bank may provide differential rates of interest if it so chooses. However, there should not be any discrimination from customer to customer on interest rate for similar amount of deposit.

This artificial divide created by RBI is contrary to its own avowed objective of financial inclusion, which would have been better served, if this discrimination was not practiced at the instance of the apex bank. The objective of liberalisation would have been best achieved if the RBI had only stated that uniform interest rate should be paid by each bank to its savings bank account holders irrespective of the amount in the account.  
The RBI has only created discrimination between the lower middle class and the upper middle class by allowing the banks to quote differential rates for balances below and above Rs1 lakh.

Obviously, this will, in all probability, result in banks quoting higher rates for depositors keeping balances above Rs1 lakh, which will only serve to pamper the rich to the disadvantage of the middle class. In fact, those keeping balances above Rs1 lakh belong to the category of high net-worth individuals (HNIs), who are better informed about alternate investment opportunities and might keep higher balances only as a stop-gap arrangement, till the excess funds are profitably deployed.

The middle class and the lower middle class on the other hand are those who are ill-informed about the banking practices due to their poor financial literary, which NGOs like Moneylife Foundation, are trying their best to improve by constantly holding free seminars at different centres across the country. It is they who need to be rewarded with a higher interest rate, as they are to be encouraged to keep all their surplus cash with banks, without hoarding them at home. Besides, they are the people who are hardest hit by galloping inflation, which is eating into their savings, and any minor relief like higher returns on their savings bank accounts would have benefitted the largest number of people in our country.  
But the present discrimination encouraged by RBI will only serve to negate this objective.

In short, the steps initiated by RBI by giving freedom to banks to fix their own interest rates on saving bank deposits in the present juncture may create more problems for the common man, who may have to face higher service charges and more restrictive practices expected to be introduced by banks to protect their own profitability, which is likely to be hit due to the higher cost of funds and increasing competition in the marketplace, in the wake of the deregulation of interest rates on savings bank deposits.

It is only to be hoped that the RBI will ensure that the interest of the common man are protected when it comes out with detailed guidelines with regard to this subject, as indicated in the midterm policy review announced on 25th of this month.  
(The author is a banking & financial consultant. He writes for Moneylife under the pen name ‘Gurpur’).




6 years ago

Till now banks were sitting pretty ,doling out just 4% interest to depositors , and the depositors were having their hands tied behind their backs by the regulation. Now let the banks compete more to give a fair deal to depositors whether poor, middle class or whatever class. But the RBI has to be alert to see that unscrupulous banks do not form cartels to charge exorbitant service charges to all and sundry.

Anil Agashe

6 years ago

The rates had to be deregulated at some time. No time is right time and all times are right times for such decisions. Not making the decision at all is worse than making it may at the wrong time.
Middle class will never have 1 lakh in savings account and hence will not get higher rate. There is no need to be critical about this. If the money is going to be available for longer periods then only banks will pay higher rates. They also have to manage their ALM.
I am glad that RBI has acted on this after a lot of dithering and in spite of opposition by the banks themselves. When freedom is shunned it is normally shunned by the incompetent the most.


6 years ago

The war continues among banks on interest rate. After nationalization of banks in 1969, RBI used to decide rate structure for deposits and for lending uniformly applicable for all banks. After adoption of reformation policy in the year 1991, RBI freed lending rates excepting loans upto Rs.2.00 lacs. In the name of competition, banks started rate war to attract high profile customers into their fold. Social banking concept and mass banking approach initiated through nationalization of banks have now become the history. Common men are now neglected for all practical purposes. High profile customers have now become the heroes and bankers now run behind them. Profit making became the priorities. Priority and neglected sector of the society became the last option for government banks as well as private banks. Lending for farmers were slowly transferred to Micro Finance Institute who have gradually started lending at higher rates , even higher than local money lenders. It is also true that in the name of poor, banks open Financial Inclusion branches and open No Frill accounts to give direct credit of various aids and subsidies to real beneficiaries. I am unable to understand how poor people will get satisfaction merely by having a bank account until their real regular income rises.

More or less up to the end of the year 2009, banks offered higher and higher rate of interest to attract bulk deposit in their fold and sanctioned loans at sub BPLR rate. It means banks offered higher rate for deposits and lower rates for advances if there was scope of doing bulk business. In this mad run for target, banks damaged the profitability and almost neglected small depositors and common men who needed small loans for their small businesses. After all it is not father’s money of any CMD of any bank, it is public money. Banks collect major chunk of low cost deposits from retail depositors but finance major chunk of their money at low rate to to big corporate .Banks offer lower rate of interest for big value advances as also big value deposits but charge higher rate on low value lending and low value deposits. Management of banks works for the pleasure of big corporate and indirectly increases their personal wealth through illegal earning. They do not hesitate to dilute lending principles for high value loans but show strict adherences for rules for low value lending. This classic culture adopted by banks have already damaged the fundamentals of banks and due to this reason government of India is forced to infuse additional capital to banks so that they can survive and adhere to stricter Basle norms.

Management of banks appear to remain busy in earning profit by resorting to bulk lending and by imposing irrational service charges like cash deposit charges on small and medium class depositors and borrowers. Banks forget making adequate provisions for pension and reduce provisions for bad asset by concealing bad assets for years together to exhibit higher profit to their mentors, ministers, RBI and government of India. Fraudulent attitude of banks continues till they are exposed by some agency or some honest officer. Banks ignore the main work of monitoring lending done by them and as a result quality of lending deteriorated and monitoring of loans completely stopped in the name of global recession. When the assets become bad they have lame excuses like global recession, rate hike, bad weather, inflation, legal constraints etc. Due to this unhealthy and mischievous mind set of bank officers, amount of gross Non Performing Assets started increasing. Bribe led lending has increased, bribe based write off of loan has increased, vote bank oriented waiver of loan resorted by government has gone up and so on. It adversely affected not only the quality of loans and deposits but also the culture of working bank employees. Officers in particular and employees in general focus on those work where they find scope of earning through illegal money to become richer and richer and for this evil work they indulge in flattery to bosses and ministers to get rid of punitive action.

Banks started opening new and new branches to please ministers and to raise business without improving the quality and quantity of manpower. Unprecedented damage has already been caused particularly to public sector banks and now RBI has added fuel to fire by deregulating savings interest rate. Cost of fund will go on increasing and yield on advances will go on falling down, one due to low lending rate and other due to increasing trend in provisioning due to rising level of NPA as also due to higher coverage ratio.NPA of banks will increase and increase only until drastic actions are taken against top officials who indulge in bribe led lending. Interest war initiated by RBI in the name of competition will spoil the future of Public sector banks and improve the profitability and overall business of private banks. Not only this , if private banks and then public sector banks start offering higher rate of interest on saving deposits, future of post office deposit schemes will also be jeopardized.

Lastly, it is wise to mention here that if big value loans start becoming bad assets due to real recessionary global pressure or due to some natural mishaps or due to some inherent weakness in the project , banks will suffer unprecedented growth in NPA which will eat their capital and create a crisis similar to subprime crisis which erupted in USA and other European countries a few years ago and which is likely to recur in coming days..



In Reply to danendra 6 years ago

Very good and painstaking analysis.

Nagesh Kini FCA

6 years ago

RBI is in deed like the proverbial mother -in-law, she prefers the richer HNI daughter-in-law in showering the goodies of higher rate of interest, at the same time taxes the poorer one on small sums of Interest of Rs.10,000+ credited on their hard earned savings! Blatant case of discrimination and favouratism.

TCS, Infosys and Wipro still resilient despite current global outlook, says S&P

In spite of the uncertainty in global demand for information technology companies and the weakening rupee, top companies in India are expected to maintain their investment grade ratings

The top Indian information technology (IT) companies, Tata Consultancy Services (TCS), Infosys and Wipro are likely to maintain their investment-grade ratings even if demand weakens. This is according to the report that Standard & Poor's Ratings Services has recently published, Big Three Indian IT Companies Are Well Programmed To Handle Uncertain Demand. The ratings of the "Big Three" companies are TCS (TCS; BBB+/Stable/--); Infosys (BBB+/Stable/--) and Wipro (BBB/Positive/--).

“The largest Indian IT companies have strong margins, are cost-competitive, and have proven delivery models. These attributes will help them to weather uncertain and volatile demand,” said Standard & Poor’s credit analyst Abhishek Dangra.

The report suggests that the three leading Indian IT companies will be able to grow at a faster pace than the global industry, at least over the next few years. S&P expects these companies to maintain industry-leading EBITDA margins and grow in double digits in the next 12 months.

The bigger challenges for the Indian IT companies will occur in the longer term. It is expected that the cost advantages of these companies will diminish as foreign competitors increase their already-large employee bases in India. Moreover, business and reputation risk is rising due to increasing protectionism. But it is expected that the three largest Indian IT companies will adapt to the challenges, as they have in the past.

The report says that companies also face issues such as dependence on the slowing economies of the US and Europe, visa issues, rising wages in India, and foreign exchange volatility. The sovereign budget cuts across the US and Europe could hurt business sentiment and lower private-sector IT spending. Though deal cancellations are not as significant as they were in 2008-2009, the time it takes to close deals has lengthened.

“High unemployment rates, slowing growth, and political activism in many countries are generating opposition to outsourcing,” said Mr Dangra. “Still, we expect focus on cutting costs in a slowing global economy to support demand for outsourcing to India. Such a practice results in significant cost savings.”

The sluggish global economy will apply pressure on pricing for Indian IT companies on export orders. But simultaneously, the weakening rupee against the dollar and the euro will improve margins to push for a mixed outlook for these companies. TCS and Infosys have deals in the pipeline for overseas orders and are not as sharply affected by the slowing economies abroad. Customers abroad are likely to embrace new technology and TCS is likely to win high-tech orders, where pricing pressure is not severe. Wipro, which has reorganised its management this year, will face some pressure on new deals and consequently revenues. But it is expected to have a healthy bottom-line.

Hiring plans are likely to be hit in top IT companies, as they move to higher wages for existing good performers and experienced new recruits. Engineering colleges and management institutes, which have many aspiring software engineers, may be adversely affected in the forthcoming placement season in terms of number of students recruited by the IT industry.

TCS is likely to improve at a greater rate and may even outpace Infosys and Wipro. TCS recorded an average sales growth of 33% during the previous three quarters, last one ending in June 2011. Its market cap to operating profit ratio is 20.1, while its return on net worth based on annualised net profit of the past three quarters is an exceptional 51%. It has a unique Global Network Delivery Model and has 1,98,500 consultants in 42 countries.  

Lower-rung IT companies may face the pinch on pressure on pricing and consequently, profits.




6 years ago

With the kind of engineers they hire we can never be sure if Infosys TCS and Wipro can withstand demands. You should read

Clash of the Khans: ‘Bodyguard’ slugs it out with King Khan for box-office stakes

First-day collections of Salman-starrer above the Shah Rukh sci-fi futuristic blockbuster, but Ra.One rakes it on Diwali with Rs62.50 crore

Shah Rukh Khan’s ‘Ra.One’ was the most awaited mega-movie of 2011. Not only because it had King Khan as a sci-fi hero, but because it was another chapter in the clash-of-the-titans saga in Bollywood. Can the King beat Sallubhai?

As far as the opening collections go, ‘Bodyguard’ still rules the roost. However, King Khan’s humanoid avatar has put up a marvellous show. As Eros International, the distributor for ‘Ra.One’ has said, Diwali sales have amounted to Rs62.50 crore.

“‘Ra.One’ grossed Rs26.50 crore with a net of Rs18.50 crore on 26th October (Wednesday), making it the highest-ever Diwali day collection in the history of Indian cinema. The second day collections on 27th October were even more impressive with the film raking in Rs36 crore gross with a net of Rs25.10 crore, making it the highest collection ever on a single day for an Indian film,” Eros said. ‘Ra.One’ opened across more than 4,000 plus screens worldwide (3,100 plus screens in India and 904 prints internationally, including 3D, Tamil and Telugu).

That is definitely something to look out for, and ‘Ra.One’ needs to deliver. Not only because it has to recover its massive Rs150 crore budget; but King Khan has to prove a point to his archrival. Salman Khan had delivered three successive super-hits with ‘Dabangg’, ‘Ready’ and ‘Bodyguard’. The last one had broken all box-office records, and on the first day of its release on Eid, it amassed a huge Rs21.50 crore—which is still the largest first-day haul.

‘Bodyguard’ opened across 2,250 screens in 70 Indian cities and with 482 prints across overseas territories. Along with ‘Singham’, it revived Reliance Entertainment’s fortunes, which had taken a beating with duds like ‘Kites’, ‘Raavan’ and ‘Haunted’.

‘Bodyguard’ surpassed Sallubhai’s own ‘Dabangg’ with its Rs213 crore collection; which had, in turn, beat Aamir Khan’s mega-cult hit ‘3 Idiots’. With Salman on a roll, and Aamir maintaining a mysterious silence over his next mega-project—while churning out another cult-hit and a critical success, ‘Delhi Belly’—King Khan had to come back with a bang.

The hype had started about a year ago, and the actor-producer had devoted himself fully to his dream project after the success (ahem) of ‘My Name is Khan’. Shah Rukh has reigned over foreign screens; having a massive fan base among NRIs and diehard fans of Indian melodramatic family sagas and romances. The domestic scene, especially the single screens, however, belongs to Salman. ‘Dabangg’ was not only a huge hit, it was a wake-up call for filmmakers who had underestimated the power of single-screens. No wonder, following ‘Dabangg’, we are seeing a return of the unapologetic over-the-top masala entertainers.

‘Ra.One’ opened to savage reviews, but nevertheless, fans flocked to root for the baadshah of Bollywood. And when had critical opinion mattered when it came to the King and Sallubhai? This battle is going to be epic.




6 years ago

SRK rules. he doesnt need to prove anything to anybody. Aamir is so insecure inspite of having such huge hits behind him. As SRK is this one actor who guarentees huge opening come what may. and only an SRK could have experimented the way hes done in holly movies spend much higher amts to get something like this out and this movie was never intended to please critical viewers. id watch the movie just for chamak challo man! the amt of time aamir takes to complete one project , srk pulls of many a coups. the true greatness of a product is in how much scalable it is. aamir is artificial scarcity to create demand wheras srk will dance in movies , attend cricket matches, do mulyiple endorsements and stay out of limelight in movies and yet be there on top. even on the peak of 3 idiots, srk was right ther on top. hail the baadshah . u rule SRK.


6 years ago

Irrespective of box office collection, the movie is not worth seeing. Overhyped. Baseless scenes, lack of proper storyline. Only positive is it has reasonably good special effects for an Indian movie.


sa bz

In Reply to Prakash 6 years ago

i don't get it if u hate him than y u listen or even look at his profile seriously tell me hypocrite.

Kuldeep sharma

6 years ago

Supurb movie fentastic movie i loved this movie...

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