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DEREGULATION OF
SAVINGS ACCOUNT
INTEREST RATE
               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.
HISTORY BEHIND
DEREGULATION
  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.
What is the need of
 Deregulation?

What are the factors that
 intended deregulation to
 occur?
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 depositor’s 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.
The concept of savings
     account
•A 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-à-vis the remaining part that had features akin to
savings.

• Accordingly, the Reserve Bank,     with effect from July 1, 1977, fixed the
interest rate on savings deposits     with cheque facilities, considered as
transactions-oriented accounts, at   3.0 per cent and the interest rate on
savings deposits without cheque      facilities, considered as pure savings
accounts, at 5.0 per cent.

• 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.
History of Savings Bank Interest Rates

          March 2, 1978 – Interest rate @ 4.5 %
          p.a



          April 24, 1992 – Interest rate @ 6.0 %
          p.a.




          March 2003 – Interest rate @ 3.5 %




                   Presently 4 @ p .a.
Ownership Pattern of Savings Deposits
  The data on the ownership pattern of savings deposits during 1998-2009 reveals that
  savings deposits are predominantly held by the household sector.

      (per cent) Sector                      1998                2009
      1                                        2                   3
      I. Household Sector                    84.8                83.6
      II. Government Sector                   8.4                 9.1
      of which:                               3.3                 5.3
      State Government                        1.9                 1.7
      Local Authorities                       1.7                 1.2
      Public Sector Corporations
      and Companies
      III. Foreign Sector                     5.3                 6.0
      IV. Private Corporate Sector            0.2                 0.4
      (Non-financial)
      V. Financial sector                     1.4                 0.8
      VI. Total                               100                 100
Costs incurred by a bank in
maintaining the savings account
 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.
Two major changes
•Change   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 RBI’s control over
the prevalent interest rates for banks’ savings
accounts.
How savings account interest is calculated?

•Earlier, interest was calculated on the lowest amount available in savings
account from 10th to the end of month. The disadvantage is that if you have a
low balance on any of these days, you will get interest on that amount only.
For example:
If the account shows the following balance for the month of February 2010:




 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 that’s currently followed and banks shouldn’t get
back to their gimmicky ways of taking the minimum balance in a month
etc.
Important aspects regarding deregulation

•New   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.

•Ifbanks 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.
Few Banks join the race
Initially, the banks which have hiked the interest rate are:

•Yes Bank
•Kotak Mahindra Bank
•IndusInd Bank



Reason


                                                • Fewer          savings
                                                accounts
       Relatively new
                                                • Do not have a strong
          players
                                                retail portfolio
Updated interest rates by
         banks
What prompted Yes Bank?

The prompt move to inject deposit hike comes on the back of its :
      - lowest share of savings bank deposits to total deposits in the whole
         industry (3% CASA deposits)
      - Hardly 1% or 2% of the private lender’s deposits come from Savings
         deposit funds.

Thus, this private bank always had more room to capitalize on free interest rate
regime unveiled by the country’s apex banker.
SBI says no immediate hike in saving deposit rates

On the other hand, India’s leading state-owned bank SBI has not yet
hiked the savings deposit rates.

State Bank of India: The rate will be increased by upto 1.25%, thus
making it 5.25%. The decision is not yet taken.

• In contrast to Yes Bank, SBI already has 34% of its total deposits in
savings bank account – which is amongst the highest industry ratio in
terms of holding low cost funds to total deposits. Thus, SBI is seen in no
hurry to introduce the deposit hike in very near-term.

•The banks which have raised savings deposit rates lack reach.

• The bank is sitting on a huge deposit base and has no concern
regarding cost of deposits going up due to the deregulation.

•The total deposits in SBI's savings accounts are to the tune of nearly Rs
3.5 lakh crore, and a hike of one per cent in interest would mean that it
would cost the bank Rs 3,500 crore, which will have to be passed on to
the customers
• 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)

•Sincethe 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.

•Axisand Bank of Baroda offers Savings Account Deposit Interest Rate @
4% (for all amounts).
Banker’s Point of view
•As  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




                  Increase in Interest rate




                             Reduction    in   Net      Interest
Margin
               if not balanced by increase in lending
                            rates
•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.



    Increase in                      Increase of Rs.
    SB interest                       1,000 crore in
    rate by 1%                     interest payments
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 pass-
    through 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
Pros and Cons of
Deregulation of
Saving Account
Interest Rate
Merits
   Will enhance the attractiveness of
    Saving Deposits.
      Regulation of interest rates imparts rigidity to the
    instrument/product as rates are either not changed in
    response to changing market conditions or changed slowly.
    This adversely affects the attractiveness of a
    product/instrument.

   Will improve transmission of monetary
    policy.
      For transmission of monetary policy to be effective, it is
    necessary that all rates move in tandem with the policy rates.
    This process, however, is impeded if the interest rate in any
    segment is regulated.
Co -relation among various rates
Interest Rate                    Co relation Coefficient




Term Deposit Rate and Monetary   .82
Policy rates




Saving Deposit Rate and Monetary .18
Policy Rates
   Will lead to product innovation
   Savings deposits constitute about 22 per cent of total
    deposits. However, owing to regulation of interest rate, there
    is hardly any competition in this segment with both banks and
    depositors acting passively. This has inhibited product
    innovations.

   May lead to financial inclusion
     Increase in SA Interest rate would encourage
    people in rural and semi urban areas to park more
    funds in Saving Account which can actually fulfill
    India’s objective of Financial Inclusion.
Demerits
   Possibility of unhealthy competition
    A major attraction of savings deposits for
    banks is that it offers a low cost source of
    funds. If deregulation happens, it will push
    up the cost of funds of the banking sector.
    This, if passed on to the borrower, will raise
    the cost of borrowings and if not, it will
    affect the interest margins and profitability
    of the banking sector.
Share of CASA          Average cost of deposits(Per cent)



Public Sector Banks
1-30%                  6.19
30-40%                 5.83
40-50%                 5.41
50% and above          NA

Private Sector Banks
1-30%                  6.66
30-40%                 5.59
40-50%                 5.18
50% and above          4.51
   Risk of Asset-Liability mismatches
      Although savings bank deposits represent short-
    term savings and withdrawable on demand, a large
    part of savings deposits is treated as ‘core’
    deposits, which together with term deposits have
    been used by banks to increase their exposure to
    long-term loans, including infrastructure loans.
    deregulation may have the potential to create asset
    liability mismatches as some banks with large
    dependence on savings deposits for financing
    long-term assets may lose savings deposits to
    some other banks.
Year   Term Deposits of more Term Loans/ Total
       than 3 years/Total Term advances
       Deposits

2001   31.7                  36.7
2002   28.7                  42.2
2003   23.9                  44.5
2004   27.8                  49.0
2005   26.5                  54.1
2006   24.5                  55.9
2007   22.6                  57.7
2008   23.1                  58.0
2009   20.2                  57.1
Share of CASA   Average Term Loans/
                Total deposits ( %)

20-30%          52

30-40%          60

40-50 %         64
   Could adversely effect Small
    savers/Pensioners
      There could be occasions, especially when the
    liquidity is in surplus, when savings deposit interest
    rates may decline even below the present level.
    This will affect the income flow to small
    savers/pensioners.
   Possibility of introduction of complex
    Saving Products
     It is also possible that banks introduce some
    complex products, which may not be so easily
    understood by savers .
INTERVIEW
Things to consider while
 opening a saving
 account
Things to consider while opening
a saving account


            Savings account interest rate



              Branch network



            Fixed deposit rate
Things to consider while opening
a saving account
      Investment advisory services



      Call centre experiences



      Net banking
Things to consider while opening
a saving account
           ATM facility


           Locker facility



           Charges on various
services
Public  Sector
Banks VS Private
sector Banks………
(what lies ahead)
   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.
Points in favour of Private Sector
Banks( if they increase SA ROI)...
     Increase in ROI would increase
      CASA
     Increase in CASA would increase
      deposits available for Term Loans
     Low cost of funds

                           BUT
       All this at the cost of decrease in NIM
                      Still Pros > Cons
Arguments against Public Sector
        Banks
   If they increase ROI
   Huge impact on NIM
   HDFC Bank has the highest share of Casa to total
    deposits at 52%, followed by the State Bank of India at
    48% and ICICI Bank at 45%.
   If they don’t increase ROI
 CASA might shift from Public Sector Banks to
  Private Sector Banks
 Asset Liability Mismatches
 Increase in cost of funds
Arguments in favor of Public
Sector Banks
   Mathematical Analysis
   Let’s 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
Saving Bank Account
 ( Money earns 4-6%   Auto Sweep Bank Account
        ROI)



                                        Auto-
                                        Sweep Acc
                                        ROI
                                        Saving Acc
                                        ROI
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.

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Deregulation of savings interest rate

  • 1. DEREGULATION OF SAVINGS ACCOUNT INTEREST RATE PRESENTED BY: HARSIMRAN KAUR (19) MALIKA BATRA (21) MITALIE SHARMA (24) RAJNI KASHYAP (30)
  • 2. 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.
  • 3. 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.
  • 4. 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.
  • 5. HISTORY BEHIND DEREGULATION  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.
  • 6. What is the need of Deregulation? What are the factors that intended deregulation to occur?
  • 7. Deregulation is needed to :  Strengthen the competitive forces,  Improve allocative efficiency of resources,  Strengthen the transmission of monetary policy,  Product innovation,  Price discovery.
  • 8. 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 .
  • 9. 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.
  • 10.  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.
  • 11. 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 depositor’s 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.
  • 12. The concept of savings account •A 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.
  • 13. • 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-à-vis the remaining part that had features akin to savings. • Accordingly, the Reserve Bank, with effect from July 1, 1977, fixed the interest rate on savings deposits with cheque facilities, considered as transactions-oriented accounts, at 3.0 per cent and the interest rate on savings deposits without cheque facilities, considered as pure savings accounts, at 5.0 per cent. • 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.
  • 14. History of Savings Bank Interest Rates March 2, 1978 – Interest rate @ 4.5 % p.a April 24, 1992 – Interest rate @ 6.0 % p.a. March 2003 – Interest rate @ 3.5 % Presently 4 @ p .a.
  • 15. Ownership Pattern of Savings Deposits The data on the ownership pattern of savings deposits during 1998-2009 reveals that savings deposits are predominantly held by the household sector. (per cent) Sector 1998 2009 1 2 3 I. Household Sector 84.8 83.6 II. Government Sector 8.4 9.1 of which: 3.3 5.3 State Government 1.9 1.7 Local Authorities 1.7 1.2 Public Sector Corporations and Companies III. Foreign Sector 5.3 6.0 IV. Private Corporate Sector 0.2 0.4 (Non-financial) V. Financial sector 1.4 0.8 VI. Total 100 100
  • 16. Costs incurred by a bank in maintaining the savings account  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.
  • 17. Two major changes •Change 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 RBI’s control over the prevalent interest rates for banks’ savings accounts.
  • 18. How savings account interest is calculated? •Earlier, interest was calculated on the lowest amount available in savings account from 10th to the end of month. The disadvantage is that if you have a low balance on any of these days, you will get interest on that amount only. For example: If the account shows the following balance for the month of February 2010: 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.
  • 19. 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 that’s currently followed and banks shouldn’t get back to their gimmicky ways of taking the minimum balance in a month etc.
  • 20. Important aspects regarding deregulation •New 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. •Ifbanks 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.
  • 21. Few Banks join the race Initially, the banks which have hiked the interest rate are: •Yes Bank •Kotak Mahindra Bank •IndusInd Bank Reason • Fewer savings accounts Relatively new • Do not have a strong players retail portfolio
  • 23. What prompted Yes Bank? The prompt move to inject deposit hike comes on the back of its : - lowest share of savings bank deposits to total deposits in the whole industry (3% CASA deposits) - Hardly 1% or 2% of the private lender’s deposits come from Savings deposit funds. Thus, this private bank always had more room to capitalize on free interest rate regime unveiled by the country’s apex banker.
  • 24. SBI says no immediate hike in saving deposit rates On the other hand, India’s leading state-owned bank SBI has not yet hiked the savings deposit rates. State Bank of India: The rate will be increased by upto 1.25%, thus making it 5.25%. The decision is not yet taken. • In contrast to Yes Bank, SBI already has 34% of its total deposits in savings bank account – which is amongst the highest industry ratio in terms of holding low cost funds to total deposits. Thus, SBI is seen in no hurry to introduce the deposit hike in very near-term. •The banks which have raised savings deposit rates lack reach. • The bank is sitting on a huge deposit base and has no concern regarding cost of deposits going up due to the deregulation. •The total deposits in SBI's savings accounts are to the tune of nearly Rs 3.5 lakh crore, and a hike of one per cent in interest would mean that it would cost the bank Rs 3,500 crore, which will have to be passed on to the customers
  • 25. • 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) •Sincethe 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. •Axisand Bank of Baroda offers Savings Account Deposit Interest Rate @ 4% (for all amounts).
  • 26. Banker’s Point of view •As 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.
  • 27. Effect of Deregulation Competition Increase in Interest rate Reduction in Net Interest Margin if not balanced by increase in lending rates
  • 28. •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. Increase in Increase of Rs. SB interest 1,000 crore in rate by 1% interest payments
  • 29. 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
  • 30.  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.
  • 31.  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
  • 32.  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
  • 33. 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 pass- through for retail bank deposit rates
  • 34.  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
  • 35. 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
  • 36. 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
  • 37. Pros and Cons of Deregulation of Saving Account Interest Rate
  • 38. Merits  Will enhance the attractiveness of Saving Deposits. Regulation of interest rates imparts rigidity to the instrument/product as rates are either not changed in response to changing market conditions or changed slowly. This adversely affects the attractiveness of a product/instrument.  Will improve transmission of monetary policy. For transmission of monetary policy to be effective, it is necessary that all rates move in tandem with the policy rates. This process, however, is impeded if the interest rate in any segment is regulated.
  • 39. Co -relation among various rates Interest Rate Co relation Coefficient Term Deposit Rate and Monetary .82 Policy rates Saving Deposit Rate and Monetary .18 Policy Rates
  • 40. Will lead to product innovation  Savings deposits constitute about 22 per cent of total deposits. However, owing to regulation of interest rate, there is hardly any competition in this segment with both banks and depositors acting passively. This has inhibited product innovations.  May lead to financial inclusion Increase in SA Interest rate would encourage people in rural and semi urban areas to park more funds in Saving Account which can actually fulfill India’s objective of Financial Inclusion.
  • 41. Demerits  Possibility of unhealthy competition A major attraction of savings deposits for banks is that it offers a low cost source of funds. If deregulation happens, it will push up the cost of funds of the banking sector. This, if passed on to the borrower, will raise the cost of borrowings and if not, it will affect the interest margins and profitability of the banking sector.
  • 42. Share of CASA Average cost of deposits(Per cent) Public Sector Banks 1-30% 6.19 30-40% 5.83 40-50% 5.41 50% and above NA Private Sector Banks 1-30% 6.66 30-40% 5.59 40-50% 5.18 50% and above 4.51
  • 43. Risk of Asset-Liability mismatches Although savings bank deposits represent short- term savings and withdrawable on demand, a large part of savings deposits is treated as ‘core’ deposits, which together with term deposits have been used by banks to increase their exposure to long-term loans, including infrastructure loans. deregulation may have the potential to create asset liability mismatches as some banks with large dependence on savings deposits for financing long-term assets may lose savings deposits to some other banks.
  • 44. Year Term Deposits of more Term Loans/ Total than 3 years/Total Term advances Deposits 2001 31.7 36.7 2002 28.7 42.2 2003 23.9 44.5 2004 27.8 49.0 2005 26.5 54.1 2006 24.5 55.9 2007 22.6 57.7 2008 23.1 58.0 2009 20.2 57.1
  • 45. Share of CASA Average Term Loans/ Total deposits ( %) 20-30% 52 30-40% 60 40-50 % 64
  • 46. Could adversely effect Small savers/Pensioners There could be occasions, especially when the liquidity is in surplus, when savings deposit interest rates may decline even below the present level. This will affect the income flow to small savers/pensioners.  Possibility of introduction of complex Saving Products It is also possible that banks introduce some complex products, which may not be so easily understood by savers .
  • 48. Things to consider while opening a saving account
  • 49. Things to consider while opening a saving account Savings account interest rate Branch network Fixed deposit rate
  • 50. Things to consider while opening a saving account Investment advisory services Call centre experiences Net banking
  • 51. Things to consider while opening a saving account ATM facility Locker facility Charges on various services
  • 52. Public Sector Banks VS Private sector Banks……… (what lies ahead)
  • 53. 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.
  • 54. Points in favour of Private Sector Banks( if they increase SA ROI)...  Increase in ROI would increase CASA  Increase in CASA would increase deposits available for Term Loans  Low cost of funds BUT  All this at the cost of decrease in NIM Still Pros > Cons
  • 55. Arguments against Public Sector Banks  If they increase ROI  Huge impact on NIM  HDFC Bank has the highest share of Casa to total deposits at 52%, followed by the State Bank of India at 48% and ICICI Bank at 45%.  If they don’t increase ROI  CASA might shift from Public Sector Banks to Private Sector Banks  Asset Liability Mismatches  Increase in cost of funds
  • 56. Arguments in favor of Public Sector Banks  Mathematical Analysis  Let’s 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
  • 57. 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
  • 58. Saving Bank Account ( Money earns 4-6% Auto Sweep Bank Account ROI) Auto- Sweep Acc ROI Saving Acc ROI
  • 59. Why settle for 6% on your savings account when short-term FDs can give 8-8.5%?
  • 60. 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.

Notes de l'éditeur

  1. real savings deposit rate , widening of interest rate differential between term deposits and savings deposits leads to reduction in the share of savings bank deposits in total deposits, Deregulation of the interest rate on savings deposit will make the rate flexible along with other interest rates depending on the market conditions. Since savings bank deposits in rural, semi-urban areas and urban areas are held largely for savings purposes, deregulation of interest rate is likely to enhance its attractiveness in these areas. (about 22 per cent) , hongkong exp
  2. Competition,branches, web-based channels, ATMs etc. degree of liquidity offered such as notice period for withdrawal, number of deposits and/or withdrawals allowed per month and percentage of amount that can be withdrawn in any given month, among others , hongkong exp
  3. However misselling, customer complaints
  4. While banks do not pay any interest on current account, interest paid on savings account deposit is 4%.
  5. For State Bank of India, which has the largest deposit base, a 100 bps increase in savings rate can potentially increase their annual interest expense (for the rest of the fiscal) by 4-5% or Rs 1,400-1,500 crore.
  6. Not a large incentive to move your account, you’d say.