Deregulating Savings Rates

The deregulation of the savings account interest rate by Reserve Bank last week has been hailed as great news for bank customers. On the 25th, there was no shortage of headlines proclaiming this as Mr. Subbarow's Diwali gift for everyone who has a savings account, which means everyone. At least one bank announced a big leap in its savings rate within hours of the RBI's announcement. However, all those who watch their savings and investments carefully were likely to have been left underwhelmed by this news.

For bank customers, the increase in actual interest income is irrelevant. This is likely to be true of all bank customers, from the poorest to the richest. If you are the kind of bank customer whose savings account has an average balance of Rs 1 lakh, then you're going to make about Rs 166 a month extra by the time the dust settles down. That's not a sum that matters to you. If you're average balance is Rs 2,000 then you will be left richer (if that's the word) by Rs 3.34 a month and there's no one to whom that sum matters. If you actually have a sum in a savings account on which this loose change matters to you, then you probably don't exist otherwise you would have heard of fixed deposits.

Unfortunately, a change that matters so little to customers will probably become a big problem for some banks. It's possible that some banks—specially those who have relatively low savings deposits will start something like a rate war and make that a cornerstone of their marketing efforts. This may already have started. As a result, others may be forced to follow. Even small changes in the savings rate could have a huge impact on the financials of larger banks who rely on their legacy of high savings deposits. And this is a curious situation. An increase in the savings rate could actually be a problem for many of the biggest banks without bringing about a perceivable benefit to individual customers.

It's for this reason that I believe that we are unlikely to see a general upwards revision of the savings rate. If a number of large banks simply refuse to raise the rates by any significant (or any) amount, it may not have much of an impact on customer choice. For products like term deposits, customers shop around for the best rates because returns are pretty much the only characteristic of the product and it's on that basis that choice is made. In sharp contrast, the rate of interest is far from the only (or even the most significant) characteristic of a savings account.

Customer choose for convenience, features, accessibility and many other characteristics. Many of them don't even choose. They passively go with wherever their salary account is, or wherever the salary account of their first job was. In large parts of the country, there still isn't much of choice as to which bank to go to for all one's banking needs. All in all, a free savings rate is likely to be considerably less than a revolution.

ever, that's not to say that it shouldn't have been done. On the principle of the thing, there was no logic for the RBI to have kept this to an administered rate and its good that they have freed it. If some banks can scrape an advantage out of the savings rate, that's good for them. It's entirely possible that as time passes, some banks may be able to create some innovative new types of savings accounts that could be genuinely meaningful for customers. There's no doubt that this is a step forward in the larger sense, even though it doesn't mean an awful lot for bank customers in the near future.