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ShouldRBI DeregulateInterest Rates??

Swapna Dalvi (56)Indu Nair (15)Swati Jaiswal (57)Anjali Bhargav (06)

Prajakta Agale (33)

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W hat is Deregulation Of Interest Rates?

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RBIS AGENDA

Deregulation of deposits and lending rates

Both deposit and lending rates are prescribed byRBI. Normally, change in the Bank Rate is expectedto lead to appropriate changes in all market rates of interest and help to achieve the given objective of monetary action .

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Against Deregulation

It will lead to ruthless competition & createuncertainty in market.

The minimum savings bank deposit required tobreak even could be double the current amount.

The behavioral pattern of CASA can change & createasset- liability mismatch.

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Highly vulnerable to liquidity in the system. At a timewhen liquidity is very tight in the system, deregulation of savings deposit rate is likely to create a lot of uncertainty and asharp increase in savings deposit rates. In the near term this

will prevent RBI to de-regulate saving deposit rates.

Deregulation of savings deposit rates will impactprofitability further . Cost of doing banking business in India isvery high, considering the high reserve requirements - Cash

reserve ratio (currently at 6% of deposits; zero yield) andstatutory liquidity ratio (currently at 24%; low yield) - and highpriority-sector lending requirement of 40% (low loan spreadsand higher credit cost).

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In favor of Deregulation

Inflation in India has averaged at 5%+ in the lastfive years. Savings deposits effectively yieldnegative earnings for customers.

Any increase in cost of deposits automatically getstransmitted into higher lending rates, thusprotecting margins

Increased competition may result in increasedemphasis on technology & Customer Service.

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Bankers Say

O P Bhatt, Chairman, Sbi says, Within the savings bank product, there could bea range of sub-products offering different facilities to the customer dependingupon what kind of business they have with the bank . So, while it would be verygood for the customer, for the bank it would be challenging to retain their share of Current Account, Savings Account (CASA).

M D M allaya, C M D, Bank O f Baroda says, I think we have started a debate onthat, so maybe once we have been mature enough to have the entire year SBaccounts interest deregulation .

Rana Kapoor,

MD and CE

O, Yes Bank says, I am a great believer that weshould deregulate savings rates, we should. It will benefit the consumer most

of all .

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So what does the future hold???

RBIS upcoming discussion paper will clarify itsstand.

It is likely that in a low interest environment therates could also go down if there is no baseminimum rate that needs to be paid.

RBI may keep the saving rates regulated withincreased rate ( 50 bps to 100 bps)

After Deregulation banks will charge for otherservices ( e.g. ATM) offered

Difficult to predict Timeframe for implementation of deregulation

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Suggestions

Create proper guidelines to service retail accounts Policy should be laid down to avoid discrimination in

interest rates among different client.

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YOU