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PRESENTED BY: HARSIMRAN KAUR (19) MALIKA BATRA (21) MITALIE SHARMA (24) RAJNI KASHYAP (30)
What is DEREGULATION ?
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.
An attempt was made to deal with pros and cons of deregulating savings deposit interest rate and take on board the suggestions of various stakeholders for either maintaining the status quo or deregulating the saving deposit interest rate.
India pursued financial sector reforms as a part of structural reforms initiated in the early 1990s. A major component of the financial sector reform process was deregulation of a complex structure of deposit and lending interest rates. The administered interest rate structure proved to be inefficient. It, therefore, became necessary to reform the interest rate structure.
Deregulation is needed to : Strengthen the competitive forces, Improve allocative efficiency of resources, Strengthen the transmission of monetary policy, Product innovation, Price discovery.
A few categories of interest rates that continued to be regulated on the lending side were small loans up to 2 lakh and rupee export credit, and on the deposit side, the savings bank deposit interest rate. The rates on small loans up to 2 lakh and rupee export credit were deregulated in July 2010, when the Reserve Bank replaced the Benchmark Prime Lending Rate (BPLR) system with the Base Rate system. With this, all rupee lending rates were deregulated. On the deposit side, the only interest rate that continues to be regulated was the savings deposit interest rate .
The Annual Policy Statement of 2002-03 had weighed the option of deregulation of interest rate on savings bank deposit accounts but the time was not considered opportune considering that a large portion of such deposits was held by households in semi-urban and rural areas. It was, however, argued that deregulation would facilitate better asset-liability management for banks and competitive pricing to benefit the holders of savings accounts.
The issue was again revisited in the Annual Policy Statement for the year 2006-07. In this context, the Indian Banks Association (IBA) while making out a case for deregulation of savings bank deposit rates in the long run, suggested for status quo in 2006. In pursuance of the announcement made in the Annual Policy Statement for the year 2009-10, the Reserve Bank advised scheduled commercial banks to pay interest on savings bank accounts on a daily product basis with effect from April 1, 2010.
Prior to the introduction of a daily product method, the interest on savings deposit account was calculated based on the minimum balance maintained in the account between the 10th day and the last day of each calendar month and credited to the depositors account only when the interest due was at least 1/- or more. After the change, the effective interest rate on savings bank deposits increased, thereby benefitting the depositors.
savings deposit is a hybrid product which combines the features of both a current account and a term deposit account.
While
a current account is primarily meant for transaction purposes and is maintained by companies, public enterprises and business firms for meeting their day-to-day requirement of funds, savings accounts are maintained for both transaction and savings purposes mostly by individuals and households.
A
savings account being a hybrid product provides the convenience of easy withdrawals, writing/collection of cheques and other payment facilities as well as an avenue for parking short-term funds which earn interest.
The
maintenance of savings bank deposit accounts, however, entails transaction costs. Where as, a term deposit doesn't involve transaction cost for banks.
The average annual growth of savings deposits, which decelerated in the 1990s compared with that of the 1980s, accelerated sharply in the decade of the 2000s. In this decade, the average growth rate of savings deposits exceeded that of demand and term deposits, notwithstanding the growth in term deposits outpacing that of savings deposits during 2005-10. The Credit Policy of May 27, 1977 for the first time drew a distinction within savings deposit accounts in that a part was considered as functionally transactions-oriented vis--vis the remaining part that had features akin to savings. Accordingly, the Reserve Bank, interest rate on savings deposits transactions-oriented accounts, at savings deposits without cheque accounts, at 5.0 per cent. with effect from July 1, 1977, fixed the with cheque facilities, considered as 3.0 per cent and the interest rate on facilities, considered as pure savings
However, the Credit Policy of March 2, 1978 merged these two accounts into a single savings account, on account of many depositors opening multiple accounts.
Presently 4 @ p .a.
(per cent) Sector 1 I. Household Sector II. Government Sector of which: State Government Local Authorities Public Sector Corporations and Companies III. Foreign Sector IV. Private Corporate Sector (Non-financial) V. Financial sector VI. Total
Interest payments to account holders Computer costs Staff salary Passbook costs Printing charges Intimation costs for inoperative accounts Costs incurred in case the customer withdraws a large sum from the bank immediately.
in the interest calculation methodology The interest calculation methodology has been shifted from minimum balance between 10th and last day to the daily product basis with effect from 1st April, 2010.
Deregulation
of Savings account interest rates Recently, the savings deposit rate has also been increased by 50 basis points to 4%. In simple words, deregulation is removing RBIs control over the prevalent interest rates for banks savings accounts.
Interest will be received on 1,000/- rupees, which is the lowest balance available in the account. According to the new circular from RBI, banks have to calculate the interest on a daily product basis and this must be implemented from April 1, 2010. This way savings account holders will not lose interest for even a rupee.
DEREGULATION
-Effective 25 October,
2011 RBI has explicitly sent notification to the banks for changing their savings bank interest rates. The banks are now free to set their interest rates for their customers.
Conditions
Uniform rate to all customers having savings account balance of up to Rs. 1 lakh. For balances above Rs. 1 lakh, banks are free to choose interest rate bands.
Banks
can create a tier structure for interest rates on balances of over Rs. 1 lakh, so they could offer 5% for balances between Rs. 1 lakh 5 lakh, and 6% for balances over Rs. 6 lakhs and so on. The way the interest is calculated should remain the same that is the daily balance method thats currently followed and banks shouldnt get back to their gimmicky ways of taking the minimum balance in a month etc.
banks can now offer a higher interest rate to persuade customers to move away from their old banks. But as can be visualized, the interest rates paid by all banks on their savings accounts will rise. This will adversely affect banks profitability.
The
banks will compete with each other on savings account interest rates therefore, a customer will benefit in the form of higher interest rates.
When
banks had to pay just 3.5% as interest, they were able to give free chequebooks, allow free cash withdrawals and charge a nominal fee for other services.
If
banks have to remain profitable, they have two options. First, increase the lending rates to ensure the same profitability in spite of paying a higher savings account rate. Second, cut costs related to savings accounts.
As
can be seen, banks have increased interest rates to get more savings accounts. But at the same time, they will be forced to remain competitive by moves such as an increase in the minimum balance requirements, having a tiered interest rate structure (wherein better rates are offered to customers with a larger balance), imposing a charge for issue of chequebooks and so on.
Reason
Lakshmi Vilas Bank can decide to give its savings account holders 5% while ICICI may decide to give its account holders 4%.
Vijaya Bank - Savings Bank - 4.00 % p.a (Effective from 03 - MAY 2011)
Since
the large banks like SBI, ICICI Bank, Punjab National Bank (PNB) and HDFC Bank have not made any changes in their interest rates, other smaller banks have not felt the need to change the status quo.
The
country's largest urban cooperative Saraswati Bank announced on November 29 that it would offer 6% interest on savings deposits which will be payable every quarter.
Axis
and Bank of Baroda offers Savings Account Deposit Interest Rate @ 4% (for all amounts).
an impact of the soaring inflation, the real rate of interest on savings is negative and hence deregulation seems inevitable. However, banks hold a mixed opinion on the same.
While the state-owned banks are more in favour of the regulated savings deposit rate, the private banks are mostly in favour of deregulation.
Many
banks affirm that if interest rates are to be deregulated then RBI should also deregulate the maintenance charges.
Effect of Deregulation
Competition
Reduction Margin
in
Net
Interest
Large Public sector banks like Punjab National Bank are examining ways how to offset the increase in Savings Bank Account. The bank has SB deposits aggregating Rs 1 lakh crore.
International Experience
Deregulation of savings bank deposit accounts in select developed and emerging market countries. Interest rates on savings account in developed countries such as Canada, Japan, Australia, New Zealand, UK, and USA are all deregulated and determined by the commercial banks themselves on the basis of market interest rates
Many countries in Asia experimented with interest rate deregulation to support overall development and growth policies Interest rates were fully deregulated in Singapore in the mid-1970s, and in the Philippines, Indonesia and Sri Lanka in the early 1980s.
Malaysia, Thailand and the Republic of Korea engaged in a gradual deregulation process, characterised by more frequent adjustments and the removal of some ceilings Interest rates on bank deposits in Hong Kong, which were regulated by a set of interest rate rules (IRRs) issued by the Hong Kong Association of Banks (HKAB), were deregulated in phases by July 2001
In response to the deregulation, a number of banks launched new products such as combined savings and checking accounts and Hong Kong inter-bank offered rate (HIBOR) linked savings products Some also revised fees and charges and minimum balance requirements, and introduced tiered structures of interest rates
Based on an examination of the effects of interest rate regulation and subsequent deregulation on the efficacy of monetary policy and rigidity of retail bank deposit rates in Hong Kong, Chong (2010) found that interest rate deregulation had increased the efficacy of monetary policy by improving the correlation between retail bank deposit rates and market interest rates and increasing the degree of long-term passthrough for retail bank deposit rates
Rates on savings accounts in China are regulated by the Peoples Bank of China, which specifies ceiling interest rates on these accounts DBS Bank, Singapore provides a facility that combines the current account and savings account, but has a higher minimum balance to be maintained and the customer is charged
In countries in which financial sector reforms also included interest rate deregulation, the action was primarily taken because real rates were negative, and were being propelled by inflationary pressures
On the whole, cross-country experience shows that in most countries, interest rates on savings bank accounts have been deregulated and are now fixed by commercial banks based on the market interest rates
Merits
.82
Demerits
Share of CASA
Year
Term Deposits of more Term Loans/ Total than 3 years/Total Term advances Deposits
Share of CASA
20-30%
30-40% 40-50 %
52
60 64
INTERVIEW
Branch network
Net banking
Locker facility
Charges on various
services
Public
What is CASA ? ?
Casa is basically the current and savings account deposits. Casa ratio is the share of current and savings account deposits to the total deposits of the bank.
What is NIM ? ?
NIM is essentially the difference between the total interest earned and total interest paid as a percentage of total assets and it shows the average margin a bank makes by borrowing and lending funds.
BUT
CASA might shift from Public Sector Banks to Private Sector Banks Asset Liability Mismatches Increase in cost of funds
Mathematical Analysis
Lets calculate how much a 1.5% hike in savings rate means for a Rs 50,000 balance. In a year it amounts to an additional interest of Rs 750, or Rs 63 more per month, before tax. If your bank hikes savings rate by 100 bps compared with 200 bps by another bank, and you switch banks, then you stand to earn only R83 more every month for a bank balance of Rs 1 lakh.
Safety factors
Other Alternatives
Liquid MFs
Liquid and ultra short-term funds have offered about 7-7.5% return per annum. Further, dividends in liquid funds and ultra short-term funds are taxed at 27% and 13.5% respectively, compared with 30.9% at which your savings bank account interest is taxed.
Sweep in Accounts
A bank account that automatically transfers amounts that exceed a certain level into a higher interest earning investment option at the close of each business day. Commonly, the excess cash is swept into money market funds
Why settle for 6% on your savings account when short-term FDs can give 8-8.5%?
CONCLUSION
The big players of the banking industry would still continue to rule. The cost of funds for many banks dependent on CASA deposits will rise, but the depositors will now get a more market-determined rates attuned to inflation and policy rates. Banks will now have to focus more on managing asset-liability mismatches and fund management rather than rely on low cost deposits. The NIMs of banks will also shrink and increasing focus will be on efficiently managing cost of operations. In effect, this will bring better efficiency in the banking system.