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Credit Policy: Will RBI bite the bullet?

BS Banking Bureau in Mumbai

The Indian Banks' Association has made a strong pitch for a one percentage point cut in the savings bank rate, from 4 per cent to 3 per cent per annum.

Individually, some of the senior bankers also have told the Reserve Bank of India that the regulator should cut the rate at least by half a percentage point, if not free it completely.

But nobody is sure whether RBI governor Bimal Jalan will touch the holy cow of the Indian banking system. The savings rate, the last relic of the administered rates system, is a politically sensitive issue and at least a tacit nod of the finance ministry is required to tinker with this rate.

To Jalan's credit, he did cut the savings rate in April 2000 (from 4.5 per cent to 4 per cent). Since then, the return on long-term deposits has come down by 3-4 percentage points: from 10.5-11.5 per cent to 6.75-7.5 per cent for deposits of three years and above. But the savings deposit rate has remained unchanged.

"The atmosphere is right for a cut in the savings bank deposit rate. All term deposit rates have come down drastically. But more important than that, the government has also cut the administered rates on small savings and public provident fund. Now, Jalan must reciprocate this gesture by cutting the savings deposit rate," a banker said.

IBA is pushing for a cut because it feels that the transaction cost in this category of deposits is too high owing to the fact that banks need to handle a large number of deposits, although the corpus of individual savings deposits is not too big.

As far as the banking industry is concerned, demand deposits (savings plus current deposits) account for about 13 per cent of the deposit portfolio. In absolute terms, they account for over Rs 1.61 lakh crore.

Some bankers hold an even more radical view. They feel savings deposits should be treated at par with current deposits and no interest should be paid on them.

"After all, all banks these days are offering the shifting facility which ensures that after a certain amount the money from savings deposits gets shifted to term deposits and earns higher interest. What's the need to pay interest on savings deposits," asks another banker.

In any case, the interest earned on savings deposits is much less than 4 per cent because interest is paid only on the lowest amount kept between the 10th and the last day of a month.

There is also another school of thought, which feels that the savings rate should be freed and left to banks to decide on. However, the RBI is unlikely to accept that. This is because it may trigger a rate war and have serious repercussions because some of the weak banks will raise rates to attract deposits.

The consensus in the banking community is that the RBI will continue with the administered savings bank rates. However, bankers are divided on the question as to whether the savings bank rate will be cut. Much will depend on the finance minister. Given a choice, Jalan may like to cut the savings bank deposit rate, at least by half a percentage point.

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