The talk of deregulation of interest rates on saving bank accounts is creating a buzz among bank customers. Obviously, since almost everyone has a savings bank account with a sizeable amount of money lying idle in it. Sure, the Reserve Bank of India's recent increase of rates on savings account to 4% from 3.5% is pumping up imagination of depositors who believe that they stand to gain the most when the banking regulator deregulates the savings account rate. However, according to banking officials, it need not be the case. True, most bankers don't think the time has not come to resort to deregulation of rates. However, even those who are ready to go along believe that it would lead to more product innovation in the industry.
It is a significant move. Currently, the savings and current account rates are the only two deposit rates regulated by the banking regulator. Before the recent increase of saving account rates by RBI from 3.5% to 4% the rates had remained unchanged since March 2003. However, deregulation of rates won't necessarily lead to a significant increase in savings account rate immediately. What will happen is that the banks will start introducing different types to accounts to customers. Also, you can't rule out the fact that the rates can also go down when there is a decline in rates in the money market.
A significant move
According to investment experts, deregulation would be make huge change in the way people use their savings bank account. Currently, savings accounts for roughly 13% of Household Financial assets in India. However, in the past 10 years these deposits have yielded considerably lower rate of return than the prevailing inflation rate. This has resulted in erosion of value of the household wealth in these deposits. For example, take a look at the current scenario. With the inflation rate at 9.4%, the 'real' savings rate is negative 5.4% at the moment. And it means the worth of the money is getting eroded every year.
Sure, it is not going to pinch every depositor so severely. For example, those who are using their savings banks accounts mainly to meet their monthly expenses and transactions wont feel much of a difference. This would applicable to a large number of account holders in large cities. However, those who keep large amount of money in savings bank and rural and semi-urban households which use their savings account to keep their entire savings, it certainly leads to an erosion of real worth over a period of time.
The likely scenario
If we were to go by what had unfolded in countries where the rates were deregulated, banks are likely to roll out a large variety of savings account with different parameters and interest rates. It has also been observed that the rates were generally higher than the prevailing rate. On their part, customers have started actively managing their savings and started moving their savings from their existing accounts to others offering higher rates of interest.
Coming to our country, the banks are unlikely to raise rates across the board. They may continue the typical savings account the offer now, complete with unlimited number of withdrawals, free cheque book, branch, phone, and internet banking access and so on. However, these accounts are likely to offer lower rate of interest as banks have to recover the cost of offering all the free services.
However, they would also offer savings account which may fetch higher interests. However, these accounts are likely to have many restrictions. For example, the bank can impose restrictions on withdrawals, either through number of transactions, access to branches or transaction amounts. The bank may also insist that one should keep a higher minimum balance in these accounts. However, all these restrictions would be rewarded by higher market-related interest rates.
According to an expert, a typical example of such type of account is the 'online only' accounts currently offered in countries like the US, UK and Australia. These accounts generally have the highest interest rates. In fact, the rates are almost close to FDs. Also, they generally do not offer cheque books. There are also restricted access to branches and the number of free withdrawals the customer can make. It is expected that these accounts will compete with savings that are currently being parked in fixed deposits and short-term Liquid Funds.
Taking a final call
As you can see, deregulation –when it happens – would result in better rates and increasing number of complex products due to the likely product innovation in the banking industry. Customers should also be prepared to see the rates going down in future. "In a rising rate regime like the current one, a deregulated savings interest rate will provide customers the opportunity to earn a higher than they currently earn on their savings accounts.
However, it is also equally true that deregulation can also have the reverse effect. That is, when interest rates start going down, the savings account rates will also would start to move down much faster than when it were regulated.
Against this backdrop, it is extremely important for customers to understand what deregulation means to them and what they may need to do to benefit from it. If you want to earn more, you should select the best account that would suit your needs. This is because after deregulation there would be typically two types of account: one that offers higher rates but with some restrictions and another with lower interest rate but with lot of free facilities. It is entirely up to the individual to figure out how to manage his liquid savings to maximise the returns. Choosing the wrong account can often result lower returns as the higher transaction costs can eat into the benefit of the higher rate.
Ideally, a person should have two accounts. One to park his liquid savings and the other to carry out the transactions he may have to undertake every month. This would ensure that the liquid savings would earn more interest. If you think it is too much of headache, dont worry. Banks are likely to introduce products that would allow you to sweep your liquid cash so that you would earn more interest on it. It is almost similar to the sweeping facility already allowed by some banks. In short, deregulation of saving account rate would require you to keep a close watch on your transaction and saving pattern. That is, if you want to benefit from the deregulation of rates.
A NEW DEAL FOR SAVERS
Deregulation won't result in higher rates on savings account all the time
When the interest rate falls, you would earn less on your savings account, too.
Banks are likely to introduce different variety of accounts with different facilities and rates
Ideally, one should have two accounts. One for saving and another one for transactions
Watch your transactions and savings pattern before deciding on the type of accounts
