Savings accounts amount to about one fourth of total deposits and there is, on average, about one account per family of four persons. It is sad that for 35 years these poor small depositors have been subsidising the well off segments of society.
October 25, 2011 is a watershed moment as Savings Bank account holders were finally freed from financial tyranny. It is amazing how a con job was inflicted on small savers by banks and the Reserve Bank of India ( RBI) for over 35 years. Small savers have been brainwashed into believing that savings bank accounts are costly to banks and, therefore, small savers deserve to get low rates of interest relative to other modes of savings. Banks and the RBI are both culpable in committing this atrocity on small savers. Savings bank accounts amount to about one fourth of total deposits and there is, on average, about one account per family of four persons. It is sad that for 35 years these poor small depositors have been subsidising the well off segments of society. The issue of deregulation of the savings bank deposit interest rate has been discussed for the past 15 years but the RBI has, on each occasion, backed off in the light of stiff resistance from vested interests.
When the RBI, in April 2011, put out a Discussion Paper on Deregulation of the Savings Bank Deposit Rate, banks went ballistic and warned about a sinister nemesis lurking round the corner and some banks went to the extent of threatening that they would not undertake financial inclusion. In such a milieu, Governor Subbarao and his team need to be saluted for taking the bold measure of deregulating the Savings Bank Deposit Rate. The RBI has, however, stipulated that in the case of savings bank deposits up to Rs one lakh, the rate determined by each bank should be the same irrespective of the amount. In the case of deposits of over Rs one lakh the banks can prescribe different rates for different amounts but for the same amount the rate should be the same for all depositors. There is a history to how the savings bank facility has evolved. In the early 1960s, savings bank accounts were restricted to only 52 withdrawals per annum and interest was paid on deposits only up to Rs 50,000. As such this facility was available only to small depositors. With increased competition, these stipulations were observed in the breech and large savings bank accounts emerged which were really current accounts masquerading as savings accounts. Many of these large accounts are held by trusts, institutions, societies etc. It is reported that about 90 per cent of the number of savings bank account holders are below Rs one lakh but the remaining 10 per cent account for a disproportionately high amount in terms of value. Most bankers have been wringing their hands that the recent deregulation will erode their net interest margins ( NIM).
This is a simplistic conclusion based on the strong possibility that the deregulated rate would be higher than the regulated rate and hence the NIM would be affected. What is not taken into account is the fact that in a deregulated environment, banks would be able to raise more savings bank deposits and reduce their high cost term deposits, and thereby bring down the effective cost of funds. As Mr. Rana Kapoor, Managing Director and CEO of es Bank has aptly said the savings bank rate deregulation is a win- win situation for depositors as well as banks. In determining the Savings Bank Deposit Rate, the es Bank has been the first off the block and it has prescribed a uniform rate of 6 per cent for all savings bank accounts irrespective of the amount. The Indus Ind Bank and Kotak Mahindra Bank have opted for a rate of 5.5 per cent for deposits up to Rs one lakh and 6 per cent for deposits over Rs one lakh. The larger banks have, intriguingly, not revealed their cards. The public sector banks ( PSBSs) are probably waiting for a cue from Big Daddy ( State Bank of India). The SBI has hinted that its savings bank deposit rate could rise by 1.0- 1.25 per cent. One hopes that the PSBs do not cartelise the Savings Bank Deposit Rate. A war of mutual annihilation, feared by some banks, is unlikely to take place and as such no disruption is envisaged in the banking system. The All- India Bank Depositors' Association ( AIBDA) has played a constructive role in bringing about the deregulation of the savings bank deposit rate. It is time the AIBDA alters its low profile. This may involve some funding. If the AIBDA were to make it known that it is open to receiving voluntary donations for financing of the stepped up activities of the Association would not be a problem. The AIBDA should now focus attention on a few operational issues First, the savings bank facility should not be available for amounts above a certain stipulated figure- any balances above the prescribed maximum should not be eligible for interest. This modification would facilitate the prescription of a single savings bank interest rate. Secondly, as part of transparency, there should be a uniform rest for savings bank accounts- monthly, quarterly or half- yearly. Thirdly, a hawk- like eye should be kept on unfair practices of imposing disproportionately high charges on small depositors. Fourthly, the AIBDA should not clamour for increasing the limit for deposit insurance. Such an increase will only put an additional burden on small depositors.
Fifthly, the Association should advocate that the Deposit Insurance Agency should be given strong regulatory powers to safeguard the interests of depositors. Sixthly, differential premium for banks should be introduced which should be put in the public domain which would assist depositors to take a view on the safety of their deposits. It is hoped that banks will use the freedom to fix their savings bank deposit rates with maturity and judgement without adversely affecting depositors.
FPJ
