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September 24, 2010India’s Central Bank RBI had proposed to deregulate the savings rate on Bank Deposits as part of the Financial Reforms.Note Savings Rate is the only regulated interest rate in the Banking Sector.This has led to a huge windfall for Indian Banks.With a savings rate of around 3.5% and lending rates of 12%,Banks manage to reap profits from this huge spread in the rates which is commonly known as the “Net Interest Margin” or NIM.Indian NIMs are very high compared to that of other countries because of this discrepancy.Indian consumers are known to deposit most of their savings in Banks as Stocks and other Assets are considered untrustworthy.Banks with high proportion of their deposits in the form of these savings deposits have much higher profitability.Note RBI has increased the returns on the savings deposits recently by shortening the length of the cumulative returns.
Indian Banks don’t want competition in this space as they will lose the supernormal profits that they make because of this regulation.Private Banks are at the forefront of this opposition which is ironical as they should are the first in welcoming deregulation and competition.However they like the close oligopoly which the Indian Banking Space has become.With RBI strict on new banking licenses,it has become a cosy club for a host of private and foreign banks.The savings rate will shoot up to near fixed deposit rates as banks compete with each other to acquire these cheap deposits.The RBI is also going slow by setting up committees when instead it should move much faster to benefit Indian Consumers.
Banks to defy RBI move on savings rate deregulation – Rediff
Banks are putting up stiff resistance to Reserve Bank of India’s move to deregulate the interest rate on savings bank accounts — the last bastion of administered rates. Banks benefit from low-cost savings deposits.
The country’s top bankers, including ICICI Bank [ Get Quote ] MD & CEO Chanda Kochhar [ Images ], State Bank of India [ Get Quote ] MD S K Bhattacharyya, HDFC Bank [ Get Quote ] MD Aditya Puri and Standard Chartered Bank Regional CEO for India & South Asia Neeraj Swaroop will meet with RBI Deputy Governor Subir Gokarn on Tuesday.
“Savings deposits are seen as a bank’s core deposits. They help us in asset-liability management. Most banks are of the view that it is too premature to deregulate the savings bank rate,” said another bank chief.
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[…] India’s Banking Sector does not like competition and favors regulation over savings bank rate which is quite low.Deregulation of this rate would decrease their profits and thus they favor regulations which safeguards their profits.While RBI has managed the fallout from the Lehman crisis well mainly due to the conservative nature in which banks have to keep a large part of their deposits in the form of government bonds,it has failed to increase the pace of financial reforms.India’s Banking Industry manages to live ensconced in their own safe cocoon.The recent Housing Loan Scam in which top PSU bank officers were implicated for taking bribes exposed the the problems with the Banking Sector.The Best Way to break the Oligopoly of Indian Banks would be to freely allow a large number of players into the sector.This would foster more competition amongst banks for deposits favoring Indian consumers.The success of Microfinance sector is partly due to the fact that Indian Banks have failed to penetrate the underserved rural sector.The Banks are managing to get huge profits from the urban sector and have little reason to get their hands dirty in the rural sector. […]