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Deregulation of Interest on Savings Bank

Posted by drgorg on October 28, 2011 at 12:10 AM

Deregulation of Interest on Savings Bank

At the very out set I tender all my best wishes on Diwali to all my readers. on the eve of Diwali itself RBI, in its' monitory policy review,has deregulated the Interest on Savings Bank account.

Interest rates on savings account in developed countries such as Canada, Japan, Australia, New Zealand, UK, and USA are all deregulated and determined by the commercial banks themselves on the basis of market interest rates

In our country, recently it was increased to 4% from 3 & a half, and just a little earlier the method of payment was changed to Daily product, from Minimum Balance. Long before it was 5% whereas, RRBs and Cooperatives were allowed to pay 0.5% extra then the other commercial counterparts, if I am correct.

Now what impact would it have on Banks.?, in Commercial Banks the CASA is about 30% whereas Savings form about 25% of Total Deposits, whereas in RRBs the Savings are about 50% of total deposits.

Lets take a look at it from banks' point of view

For banks, the major part of their income is generated from the interest rate differences between the lending rate and deposit rate. Lower rate on savings helps the banks to keep the deposit rates low. CASA is usually known for its low interest costs which banks can lend at a higher  rate. The contribution of CASA in bank’s profit is very big. Any increase in the CASA rates will reduce bank’s profit. As per an estimate, CASA deposits are about 30%-50% of the total deposits.

Deregulation timing is not right because of unstable market situations. Deregulating saving accounts deposit rates may result in high cost to banks. AT this juncture of time the interest rate iis very high & credit is steadily going down, which may adversly affect profits.

The rising interest rates have already increased the prospect of NPAs again hitting the margin of banks.

Many banks have been asking RBI since long to deregulate various services provided by banks, essentially, to ensure that Banks can charge for some services which are free now.to broaden the Financial Magin, whcih is getting thinner and thinner day by day.

What the Depositers Get.?

Depositers may get a higher interest rates. Deregulating will increase competition between banks and it will benefit the depositors. Since Time deposit rates were deregularised, Depositers do have a choice to opt for a Better scheme.

But they should be ready to pay some charges whcih might come up to coverup for the losses incurred, by paying higher interest so hiked, to the Banks.

Now at the end  I think our country is clearly devided in two zones, one I would call urban and the other is rural. and what I observed is most of the savings deposits come from rural area and in small lumps, again the policy says different rate structures for say Rs. 100000/- and above and smaller amounts. So the persons with smaller ability of savings will get lower earnings as interest and Big Fries will obviously get more.

Its been long since I could write anything ,hence may be its not as good at it should have been

What do you think friends.?

Please show no mercy, your frank and straight openion is always welcome

Adieu until I come back with some more stuff to bore you.

Satyajit

For a more critical view you can read an article here


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