Reserve Bank of India should deregulate savings deposits and link the return on these deposits to its repo rate as depositors are being ripped of Rs 36,000cr under the present system, says an Indian Institute of Technology report
The repo rate - the rate at which RBI lends overnight funds to banks - is used by the central bank as a benchmark for signaling policy rates. While all other interest rates, including fixed deposits, are decided by banks themselves, the return on SB (savings bank) accounts is fixed by RBI. According to the study, the fixed rate (4%) is low even as cost of servicing customers has shrunk because of technology. At the same time the real returns to the depositors are negative as rate of inflation is more than double the savings deposit rate. The study has been undertaken by Ashish Das from the Department of Mathematics, IIT, Mumbai. In the past a study by Das had prompted the central bank to change the mode of calculating interest on savings deposits from minimum balance during the month to a daily interest calculation. Now Das has pointed out that banks are saving close to Rs 36,000cr in interest payments because account holders are not getting their due. The research shows that on an average there have been about Rs 13 lakh crore parked under SB deposits and about Rs 4.5 lakh crore in current account deposits in the past 12 months. These current account and savings deposits are termed as CASA or 'demand deposits' and are much sought after by banks as they are a source of low-cost funds. According to Das, although depositors have the freedom to withdraw funds at will on an average, 92% of the total amount of SB deposits held by banks always remains with the bank throughout the year. Given the present rates prescribed by RBI on savings deposits, banks pay roughly Rs 48,000 crore a year. Now if banks were to provide depositors a return equivalent to what they pay on one-year deposits, which on an average is around 7%, they would have to pay 84,000 crore on these same deposits. "The prime reason why depositors' money is not receiving more interest is the RBI's choice to give the balance Rs 36,000 crore to the banking sector to retain their profitability and to cross subsidise their expenditures," said the report. According to Das, the floor rate for savings deposits can be around half the repo rate. The system can be made pro-consumer by rounding rates to the higher percentage point. Bankers agree that there is scope to increase returns on savings deposits. However, all the large banks are against complete deregulation of savings rates as they feel this could trigger a rate war by upstart banks, who have little to lose. Bankers also admit that technology has vastly increased profitability and that money is likely to lie longer in bank account as more depositors use electronic modes for payments.
TOI
