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A deposit account held at a bank or other financial institution that provides principal security and a modest interest rate. Most liquid investments outside of demand accounts and cash. Combination of current account and term deposits.
Number of free withdrawals are generally stipulated on a half-yearly/quarterly basis. No ceiling has been stipulated on the maximum amount drawn per transaction. There is generally no limit on the number of cheques that can be drawn per month.
Interest on savings accounts is usually compounded daily and paid monthly. Daily compounding = Principal (1 + interest rate/365)365 = (daily compounded amount) The most common type of bank account. Minimum balance is stipulated.
Banks usually offer two types of savings accounts:a) Basic savings account or passbook savings account.b) Money market account.
Early 1990’s – India pursued financial sector reforms as a part of structural reforms. Major components of financial sector reform process are,• Deregulation of complex structure of deposit• Lending interest rates
April 1985 – Banks allowed to set interest rates for maturities between 15 days upto 1 year. May 1985 – Withdrawn the freedom. April 1992 – Single ceiling rate of 13% for all deposits above 46 days. November 1994 – Ceiling rate was brought down to 10%. April 1995 – Raised to 12%. October 1995 – Banks were allowed to fix interest rates on deposits with maturity of over 2 years.
July 1996 – Relaxed to maturity of over 1 year. April 1997 – Ceiling rate for deposits of 30 days upto 1 year was linked to Bank rate. October 1997 – Deposits rate were fully deregulated by removing the linkage to Bank rate. April 1998 – RBI gave freedom to commercial banks to fix their own interest.
An interest rate is the cost of borrowing money The interest a lender receives is his compensation for taking a risk interest rate is your compensation for temporarily giving up the ability to spend your cash. Interest rate for secured credit and unsecured credit
INFLATION:- NO INFLATION OR DEFLATION IS A WORSE ECONOMIC INDICATOR. LOWER INTEREST RATES PUT MORE BORROWING POWER IN THE HANDS OF CONSUMERS.
The process of deregulation started in October 1997. Deregulation – prior to this the interest rate was 3% to 4% . It was fixed and regulated by RBI . As a result of deregulation the interest rates are higher for deposits of more than Rs 1 lakh. Interest rate for the amount upto 1 lakh,banks are supposed to maintain same interest rate.
Interest rates on savings account in developed countries determined by the commercial banks according to market conditions. Savings bank accounts may carry customer charges. Many Asian countries deregulated interest rates to support - overall development and growth policies.
May Enhance Attractiveness of Savings Depositsa. There was no changes in the interest rate in response to changing market conditionb. Since savings bank deposits in rural, semi-urban areas and urban areas are held largely for savings purposes, deregulation of interest rate is likely to enhance its attractiveness in these areas.
Will Improve Transmission of Monetary Policya. transmission of monetary policy to be effective, it is necessary that all rates move in tandem with the policy ratesb. overall cost of deposits does not move in sync with changes in the policy rates, thereby affecting the monetary transmission
Product innovations may include a variety of modes of operations such as branches, web- based channels, ATMs etc combined savings and checking accounts launched in Hong Kong
Possibility of an Unhealthy Competition Risk of Asset Liability Mismatches May Lead to Financial Exclusion Could Adversely Affect Small Savers/Pensioners Possibility of Introduction of Complex and not so Easily Understood Savings Products
a. low cost source of fundb. 49 banks, which have below average CASA deposits, constitute about 50 per cent of total asset of the banking sector.
a. a large part of savings deposits is treated as ‘core’ deposits, which together with term deposits have been used by banksb. as an asset-liability mismatch wherein assets (loans) have a longer maturity compared to liabilities (deposits).c. shift funds from one bank to another in search of returns.
High transaction cost This will discourage small savers, especially in rural and semi- urban areas from opening savings deposits accounts.
when the liquidity is in surplus, when savings deposit interest rates may decline even below the present level.
DEREGULATION IMPACT ON BANKS Increased costs and decreased profitability Less takers for short term fixed deposits Increased competition Asset and liability of banks
Higher earnings from saving accounts Short term investment option Increased cost of loans for borrowers Increased charges
LIQUID FUNDS ARE MUTUAL FUNDS SOME INVESTORS MIGHT MOVE THEIR FUNDS TOWARDS SAVINGS ACCOUNT AS IT OFFERS HIGHER LIQUIDITY AND SAFETY OF THE PRINCIPAL AMOUNT. liquid funds yield better returns if we take tax rate into account. With deregulation, this category of mutual fund will definitely offer more innovation.
Savings deposit interest rate can not be regulated for all times to come when all other interest rates have already been deregulated as it creates distortions in the system. The RBI said that deregulation of interest rates in India since the early 1990s has improved the competitive environment in the financial system, imparted greater efficiency in resource allocation and strengthened the transmission mechanism of monetary policy.
Deregulation of interest rates on savings bank account will only prompt customers to move from one bank to another, rather than bringing in new customers into the banking system. Banks wishing to enjoy cheaper (savings bank) funds will, therefore, have to work much harder on non-interest factors like service quality, ease of access and other related services on offer to retain customers and ensure their loyalty