Experts believe that the Reserve Bank of India (RBI) will soon deregulate the savings bank rate. After circulation of a discussion paper on the pros and cons of savings bank deregulation, central bank invited comments from various quarters, and then raised the savings bank rate by 50 basis points in its annual monetary policy early May.

RBI should be quick in deregulating savings as it has the tacit approval of the government. If RBI decides to free the savings bank rate in a phased manner, it will probably keep a floor for the rate in the first phase allowing banks to offer more. Currently, banks are offering 4% interest rate on such deposits. If RBI keeps the current rate as the floor, it will mean banks will be allowed to offer more than 4% to consumers, but not less than this. This will protect consumers.

Savings bank deposits constitute about 22% of the Rs. 53.46 trillion deposit portfolio of the Indian banking industry, and if the banks get the freedom to fix rates, there will be lot of changes.

The interest rates will dependent on two critical parameters—

1. The mode of operation:

• Consumers who never visits a branch and even an automated teller machine (ATM) and uses only Internet for all transactions, will be offered the maximum interest rate as the transaction cost for net banking is cheaper than ATM and branches.
• An ATM user will earn more than a branch-goer but less than a consumer who does banking only through the Internet.
• And since branch banking is most expensive among all channels, those customers who visit bank branches to deposit and withdraw money from savings bank accounts will get the least.

1. How much money is kept in a savings account:

• One who keeps Rs. 1 lakh will certainly get more interest than another person who keeps Rs. 10,000 as banks stand to benefit from higher amount of deposits kept with them.
• For those who are not keeping enough money in their savings accounts, banks can put restrictions on their use of branches and ATMs, and even the issue of cheques and quarterly account statements to cut cost.
• Currently such restrictions are imposed only on the so-called zero-balance accounts where customers are not required to keep a minimum balance.

SBI made a smart move by raising its short-term deposit rates by a massive margin. The simple reasoning being: if it is running short of cash and needs to borrow from RBI, it will have to pay 7.25% for overnight money. But they will be paying less to the depositors than what they would have to shell out for RBI. And secondly, if the bank is unable to deploy the money, it will not be affected as they can always keep it with RBI and earn 6.25%, the same interest rate that it is paying to the depositors! So it is a win-win situation no matter what…