While the RBI argued that the freeing of savings deposit rate would increase opposition and innovation and benefit depositors, bankers said it could lead to higher transaction costs.

"Deregulation will also allow banks to introduce product innovations which could also benefit the depositors," the RBI said in its draft discusson paper while inviting public comments on freeing the interest rate on savings account.

While the RBI deregulated interest rates on fixed deposit schemes in 1997, it continues to fix the rate on savings deposits. Presently, banks pay interest at the rate of 3.5 % on saving accounts, which was fixed in 2003.

Commenting on draft discussion paper, ICICI Bank Managing Director Chanda Kochhar said, "It needs to be looked at in conjunction with other offerings on a savings account. It is not the interest rate alone which we should look at, but also at the transaction charges.

I feel, if the interest rates go down, transaction charges will have to go up and if interest rates go up, the transaction charges will reduce. We will have to deregulate the entire product and not just the interest rate," she said.

Indian Bank Chairman and Managing Director T M Bhasin said in the deregulated scenario saving rate would be market determined.

The savings rate would depend on demand and supply and the liquidity situation, he said, adding, banks would put transaction charges for some services.

Currently, banks offer free cheque book, debit or ATM and cash handling.

Savings deposits are a popular product and they constitute about 22 % of total deposits of scheduled commercial banks and about 13 % of financial savings of the household sector.

Giving the pros and cons of deregulation of savings account interest rates, the RBI paper also said the apprehensions that such a move would lead to "unhealthy" competition among the banks are unfounded.

Pointing out that the deregulation of fixed deposit rates 13 years did not result in unhealthy competition among the banks, "deregulation of savings deposit rate may also not result in any unhealthy competition," it said.

Moreover, the paper added that savings deposit interest rates cannot be regulated for all times to come when all other interest rates have already been deregulated, as it creates distortions in the system.
Source: [NDTV]