The document discusses the deregulation of interest rates on savings bank accounts in India. It provides background on the deregulation process starting in the 1990s. It outlines both potential benefits of deregulation, such as enhancing attractiveness of savings deposits and improving monetary policy transmission, and risks, like unhealthy competition and asset-liability mismatches for banks. Overall, the document examines the impact of interest rate deregulation on banks, customers, and the financial system.

1.  SOP GROUP:11
GROUP MEMBERS:
AKHIL P
FINNY TOM
LAKSHMI PRIYA
REYAN JOHNY
SONY ROY

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.  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.

4.  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.

5.  Banks usually offer two types of savings
accounts:
a) Basic savings account or passbook savings
account.
b) Money market account.

6.  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

7.  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 May 1985 – Withdrawn the freedom.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.

8.  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.

14.  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

15.  INFLATION:-
 NO INFLATION OR DEFLATION IS A WORSE
ECONOMIC INDICATOR.
 LOWER INTEREST RATES PUT MORE
BORROWING POWER IN THE HANDS OF
CONSUMERS.

16.  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.

17.  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.

18.  May Enhance Attractiveness of
Savings Deposits
a. There was no changes in the
interest rate in response to
changing market condition
b. 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.

20.  Will Improve Transmission of
Monetary Policy
a. transmission of monetary policy to be
effective, it is necessary that all rates move
in tandem with the policy rates
b. overall cost of deposits does not move in
sync with changes in the policy rates,
thereby affecting the monetary transmission

21.  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

22.  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

23. a. low cost source of fund
b. 49 banks, which have below average CASA
deposits, constitute about 50 per cent of
total asset of the banking sector.

24. a. a large part of savings deposits is treated as
‘core’ deposits, which together with term
deposits have been used by banks
b. 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.

25.  High transaction cost
 This will discourage small savers, especially
in rural and semi- urban areas from opening
savings deposits accounts.

26.  when the liquidity is in surplus, when savings
deposit interest rates may decline even below
the present level.

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

28.  Higher earnings from saving accounts
 Short term investment option
 Increased cost of loans for borrowers
 Increased charges

29.  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.

30.  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.

31.  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