There have been innumerable comments on deregulation of the savings bank interest rate ever since the RBI announced it. All banks are under the common opinion that their cost of deposits will increase with the deregulation of the SB rate. Linkage of inflation to the interest rate on deposits is not at all realistic as inflation will be always on higher side. The expectation of a real rate of return on the savings bank rate of interest is also not correct. Generally, savings bank accounts are maintained for the purpose of day-to-day expenditure and urgent needs. Very few people use the funds in such accounts for investment purposes as there are plenty of investment sources other than the Savings Banks deposits maintained by banks. Hence, the bankers' argument that the cost of deposits will increase if deregulation of the SB rate is allowed is also not fully correct. Even if they do, this can be offset with the increase in minimum balances and transaction costs. It is true that the overall cost of deposits will fall with the low-cost and no-cost funds, as they are called in CASA. Even after deregulation of SB rates there will be no notable effect on cost of funds as no bank will dare to increase the rate to 9 per cent from the present 4 per cent. Hence, the RBI should proceed with deregulation of savings bank rates to facilitate the poor and middle-class people whose savings accounts are used for their short-term needs.
T.S.N.Rao, Branch Manager, Indian Bank, Palakol (Business Line)
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