DEREGULATION OF SAVINGS ACCOUNTS INTEREST RATE

1. P R E S E N T E D B Y A L O K K U M A R S E C T I O N - C

2.  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.

3.  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

4. March 2, 1978 – Interest rate @
4.5 % p.a.
April 24, 1992 – Interest rate @
6.0 % p.a.
March 2003 – Interest rate @
3.5 %
Presently 4 @ p .a.

5.  Interest Rates for Savings Bank Deposit vis-à-vis Select Term Deposits
Note : Data pertain to 5 major public sector banks

6.  It means it will not be under control of RBI anymore. The
interest rates will differ for each bank. The banks will
decide the interest rates based on their financial
condition and other factors. The deregulation puts more
competition among the banks to attract more savings
bank account holders.
 As a part of financial sector reforms, the Reserve Bank
has deregulated interest rates on deposits, other than
savings bank deposits. The interest rate on savings bank
deposits has remained unchanged at 3.5 per cent per
annum since March 1, 2003.

7.  Early 1990’s – India pursued financial sector reforms as
a part of structural reforms
 April 1992 – Single ceiling rate of 13% for all deposits
above 46 days
 November 1994 – Ceiling rate was brought down to 10%
 October 1995 – Banks were allowed to fix interest rates
on deposits with maturity of over 2 years

8.  The process of deregulation started in October 1997
 Deregulation – prior to this the interest rate was 3% to 4%
 As a result of deregulation the interest rates are higher for
deposits of more than Rs 1 lakh
 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

9. Strengthen the competitive forces
 Improve alocative efficiency of resources
 Strengthen the transmission of monetary policy
Product innovation
Price discovery

10. PROS
May Enhance Attractiveness of Savings deposite
Will Improve Transmission of Monetary Policy
May lead to product innovation such as
branches, ATM etc

11. CONS
 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

12. DEREGULATION IMPACT ON BANKS
 Increased costs and decreased profitability
Less takers for short term fixed deposits
Increased competition
Asset and liability of banks 22

13. DEREGULATION IMPACT ON DEPOSITERS
Higher earnings from saving accounts
Short term investment option
Increased cost of loans for borrowers
Increased charges

14. IMPACT ON LIQUID FUNDS
 Liquid funds are mutual funds
 Some investors might move there funds towards savings
account as it offer higher liquidity and safety of the principle
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

15.  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

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