Documente Academic
Documente Profesional
Documente Cultură
SR. NO.
PARTICULARS
PAGE
NO.
EXECUTIVE SUMMARY
HISTORY
SAVINGS DEPOSITS
10
11
12
IMPACT ON BANKS
13
16
ADVANTAGES OF DEREGULATION
18
10
DISADVANTAGES OF DEREGULATION
22
11
12
29
13
31
14
39
15
ADVANTAGE OF DEREGULATION
42
16
DISADVANTAGE OF DEREGULATION
43
17
INTERNATIONAL EXPERIENCE
44
18
CONCLUSION
46
19
BIBLIOGRAPHY
48
20
ACKNOWLEDGEMENT
49
25
EXECUTIVE SUMMARY
Reserve Bank of India has given freedom to banks to set their own interest rates on
Savings Bank deposit accounts. Till now, SB deposit interest rates were decided by
RBI and banks offered RBIs uniform rate to SB accountholders. On 25 October
2011, RBI announced deregulation of SB interest rates with immediate effect. The
same day, Yes Bank raised its interest rate on SB deposits by 200 basis points (or
two per cent) to six per cent.
While the RBI had deregulated interest rates on fixed deposit schemes in 1997, it
continued to fix the rate on savings bank deposits till 2011. The interest rate on
savings bank deposits had remained unchanged at 3.5 per cent since March 1,
2003.
RBIs deregulation drive on saving interest rates has created a competitive
environment across banks in an effort to retain and capture a loyal customer base.
The second quarter of the monetary policy review instructed banks to implement
deregulation of savings bank rates, allowing banks to set their own interest rates.
The deregulation took place because Savings deposit interest rate can not be
regulated for all times to come when all other interest rates have already been
deregulated as it creates distortions in the system.
The rate of interest in savings bank account was 4% per annum as mandated by the
government in May 2011. However with the change banks are now allowed to fix
their interest rates for saving account customers.
Banks now use this as a competing factor and weave it into their merits to enhance
their customer base.
The savings account holders have maximum benefits for their money irrespective of
the time period. Before deregulation there was hardly any competition in this
segment, and all banks offered the same rate of interest. So, there were no second
thoughts for customers about shifting their savings account from one bank to
another. However, now customers think twice before they start a new account or
wish to switch an existing account to get the maximum benefits.
The deregulation resulted in positive real interest rates, which in turn contributed to
an increase in financial savings. Deregulation of savings bank deposit interest rate
also led to product innovations. The RBI said that deregulation of interest rates in
India since the early 1990s has improved the competitive environment in the
financial system, imparted greater efficiency in resource allocation and strengthened
the transmission mechanism of monetary policy.
K.C.COLLEGE
K.C.COLLEGE
Increased charges:
The additional interest expenses on the savings account borne by the bank
may be passed on to customers in the form of charges on transaction or ATM
usage.
K.C.COLLEGE
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 depositors
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.
K.C.COLLEGE
POST DEREGULATION
Post deregulation, the banks will be free to fix the interest rates on saving deposits. It
will be decided by the market interest rates which in turn will be decided by the
overall liquidity situation in the market and that of the bank.
Though the market interest rates have fluctuated over a period of time, interest rates
on saving bank deposits have remained unchanged at 3.5 % pa since March 1,
2003. The interest rate on saving bank deposits was less as compared with interest
rates on term deposits of one month and above. Considering that 22% of the bank
funds come from these deposits, banks benefited by this low interest rate.
Amount lying in savings account can be bifurcated into (a) amount kept for
transaction purpose and (b) saving component.90% of the amount in savings deposit
is held for saving purposes. Even though the tenure of such savings is not easily
determinable, it can be safely assumed that it can be more than 1 - 1.5 months on an
average and warrants more interest rate.
Thus, once the deregulation takes place, one can expect overall increase in saving
deposit rate. However, there might be period during which overall liquidity situation is
in surplus and banks are able to procure cheaper funds. During such periods, saving
deposit rate may get reduced and can even be lower than 4% p a. The probability of
occurrence of such instances will be rare and for short period of time frame.
Once deregulation was in effect, banks needed to compete and scramble for saving
deposits. In such competitive landscape, banks introduced customized and complex
products to attract customers. It can be a combination of savings and current
account, or combination of savings and fixed deposits. It offered layered interest
rates where interest rate depends on the quantum of funds lying in savings account,
with higher the amount, higher the rate. One needed to see the suitability of such
products before opting for any of them.
Further, since higher rate had an impact on the profitability of banks, people needed
to be ready to pay for services available from bank. Thus banks started charging, in
case not already charging, or increase the charge for withdrawals in excess of
maximum permitted within a specified period. They charged people to issue cheque
books, charge in case visit their branches or charge for making a phone call and
speaking with their customer care representatives. All this will lead to increase in
bank charges.
K.C.COLLEGE
DEFINITIONS
(a) Demand deposit means a deposit received by the bank, which is withdrawable
on demand.
(b) Savings deposit means a form of demand deposit which is a deposit account
whether designated as Savings Account, Savings Bank Account, Savings
Deposit Account or other account by whatever name called which is subject to the
restrictions as to the number of withdrawals as also the amounts of withdrawals
permitted by the bank during any specified period.
(c) Term deposit means a deposit received by the bank for a fixed period and which
is withdrawable only after the expiry of the said fixed period and shall also include
deposits such as Recurring/Cumulative/Annuity/Reinvestment deposits, Cash
Certificates, and so on.
K.C.COLLEGE
10
SAVINGS DEPOSITS
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.
K.C.COLLEGE
11
FEATURES
The operation of a savings bank account differs from bank to bank. However, still
some broad features could be identified:
One, number of free withdrawals is generally stipulated on a halfyearly/quarterly basis. Total numbers of withdrawals vary between 30 and 120
per half year.
Two, no ceiling has been stipulated on the maximum amount that can be
drawn per transaction.
Three, there is generally no limit on the number of cheques that can be drawn
per month. However, some PSBs have restricted the number of cheques that
can be drawn on about 20 to 25.
K.C.COLLEGE
12
First, each bank will have to offer a uniform interest rate within this limit.
Second, for savings bank deposits over Rs one lakh, a bank may provide
differential rates of interest, if it so chooses. However, there should not be any
discrimination from customer to customer on interest rates for similar amount
of deposit.
K.C.COLLEGE
13
Increased competition:
In the competitive world of retail banking, every bank uses aggressive
mechanisms to retain and attract customers. The deregulation move could
make savings account interest rate as a decisive factor for customers to opt
for a particular bank. Banks would have to offer customers more value for
their money, as part of their marketing effort.
K.C.COLLEGE
14
K.C.COLLEGE
15
K.C.COLLEGE
16
K.C.COLLEGE
17
THE GUIDELINES
Though the Reserve Bank of India has given banks a free hand to decide the interest
rate, certain guidelines have to be adhered to by all banks.
1. A uniform interest rate is to be maintained on all savings account deposits up
to Rs. 1 lakh, irrespective of the amount in the account. This means that all
deposits from Re 1 to Rs 1 lakh must be paid the same interest rate.
2. For all deposits over Rs. 1 Lakh, a differential rate may be offered, provided
there is no discrimination in the interest paid between one deposit and
another of similar amount, accepted on the same date, at any of its branches.
3. Deregulation is applicable only to the interest rates on savings accounts of
Resident Indians. Interest rate on Non-Resident Accounts will continue to be
regulated.
K.C.COLLEGE
18
ADVANTAGES OF DEREGULATION
1) Enhance attractiveness of savings deposits: Regulation of interest rates imparts
rigidity of instrument/product and as interest rates are not changed in response to
changing market conditions the product loses it sheen. This has primarily affected
the saving bank deposits. So deregulating the interest rates would help in enhancing
the attractiveness of this product. Empirical evidence suggests that widening of
interest rate differential between term deposits and savings deposits leads to
reduction in the share of savings bank deposits in total deposits.
This trend is also clearly discernible in respect of population groups (rural, semi
urban, urban) other than metropolitan areas, where savings deposits are not
responsive to the interest rate differential. This perhaps suggests that savings
deposits in metropolitan areas are held less for savings purposes and more for
transaction purposes and hence, are less responsive to interest rate changes.
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.
Will Improve Transmission of Monetary Policy
Regulation of savings deposits interest rate has not only reduced its relative
attractiveness but has also adversely affected the 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. Savings deposit constitutes a sizeable
portion (about 22 per cent) of total deposits. The fact that the savings deposit interest
rate has not been changed since March 1, 2003, prima facie implied that changes in
policy rates did not transmit to savings bank deposits. However, before arriving at a
firm conclusion in this regard, it is necessary to consider two possibilities here. One,
even though the savings deposit interest rate is fixed, what matters for banks is the
overall cost of deposits and not cost of any particular component. And if the overall
cost of deposits moves in tandem with the policy rates, then monetary transmission
is not adversely affected. The other possibility, however, is that banks independently
decide interest rates on freely determined components, disregarding the cost of
savings deposits, in which case the overall cost of deposits does not move in sync
with changes in the policy rates, thereby affecting the monetary transmission. This is
a behavioral issue and it is difficult to find a precise answer to this question. The
correlation coefficients of savings deposit interest rate with both the call money rate
(the operating target) and the lending rate of scheduled commercial banks were
much lower than those of term deposits. This suggests that regulation of the interest
rate on savings deposits has impeded the monetary transmission and that
deregulation of interest rate will help improve the transmission of monetary policy.
K.C.COLLEGE
19
4) RBI policies would become more effective: As savings account constitute around
22% of the total bank deposit, it provides a source of low cost fund to the banks.
Even when the Repo rate was hovering around 8.25%, the savings rate was fixed at
4% before deregulation. Thus the monetary policy review did not have any impact on
this particular source of fund for the banks. After deregulation it is expected that
savings rate would move in tandem with the RBI monetary policy thus making the
policy more effective.
K.C.COLLEGE
20
5) Competition among banks: Most banks would like to maximize their CASA ratio as
it provides funds at low cost. Before deregulation there was hardly any competition in
this segment and banks especially public sector banks hardly did any innovation in
this segment. But after deregulation, it is expected banks would try to lure customers
by offering higher interest rates along with other innovations/flexibility to get as many
accounts as possible.
6) It raises the level of competition between banks which directly benefits the
customers.
7) Maximum return for your money.
8) High interest rates on short term deposits (less than 6 months).
9) Switching banks offers better options.
K.C.COLLEGE
21
K.C.COLLEGE
22
DISADVANTAGES OF DEREGULATION
1) Unhealthy competition: Saving bank deposits form a major chunk of CASA
deposits for banks. So the lure of attracting more saving bank deposits would result
in banks acting irrationally. If not handled properly this would result in unhealthy
competition among the banks in the long term.
A major attraction of savings deposits for banks is that it offers a low cost source of
funds. This is evident from the fact that bank groups with higher share of CASA
(current account and savings account) deposits (of which savings deposit is a major
component) enjoy relatively low cost of deposits. However, the distribution of CASA
deposits among banks is not uniform.
It has also been observed that 49 banks, which have below average CASA deposits,
constitute about 50 per cent of total asset of the banking sector. Therefore, given the
attractiveness of savings deposits, it could be argued that deregulation may lead to
unhealthy competition amongst banks. Should it really happen, it will have
implications in that 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.
2) Risk of asset liability mismatch: Saving bank deposits are basically short term
savings and are withdrawable on demand. In case of deregulation it could result in
asset liability mismatch for the banks. The end result would be ultimately bank credit
for customers would be difficult to come by.
One of the issues often raised by banks in the context of deregulation of savings
bank interest rate is that in the event of such deregulation, it would result in an assetliability mismatch. This is because, although savings bank deposits represent shortterm 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.
This is reflected in the increase in the share of term loans in total loans, barring
foreign banks, during the period between 2001 and 2009.
Significantly, during the same period (2001-2009), the share of long-term deposits
(more than 3 years) in total term deposits declined almost steadily.
In a scenario when savings deposits are used to finance long-term assets,
deregulation of savings bank interest rate, it is argued, would have implications for
asset liability management of banks. Any unhealthy competition, arising out of
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.
K.C.COLLEGE
23
3) Could affect small savers/ pensioners: There are people who depend on interest
rate as a source of income. Currently they are receiving a fixed rate on saving
bank deposits but in the future after deregulation if there is excess liquidity in the
system the interest rate would fall to a level much below than the current rate
adversely affecting this group.
Primarily the deregulation is being pushed for by the smaller/newer banks as
compared to older/bigger banks. These small banks have small percentage of CASA
deposits and in the current scenario attracting saving bank deposits is not easy. The
reason being since the savers don't find any difference to shift to newer banks, they
would still continue to their existing bank than shifting to a newer one. With this
deregulation they could innovate in this space and attract a higher percentage of
saving bank deposits.
Internationally many countries especially developed ones and those having
high inflation rates have deregulated interest rates and the experiences have been
fairly satisfactory. So buoyed by this data there have been a section of people in our
country who are pushing for the same.
4) Could impact small households: When interest rates are deregulated, it could be
on the downside as well. Banks would not be in a position to compensate savers
properly if there is enough liquidity in the system. This would impact small savers
and pensioners who depend only on savings rate interest for their livelihood.
5) Impact on liquid funds: Liquid Funds are mutual funds that primarily invest in debt
securities and offer higher post tax returns as compared to savings deposit. They
normally invest in Commercial Papers (CPs), Certificate of Deposit (CDs) and
Treasury Bills of maturities less than 91 days. Their mandate is to optimize returns
with preserving capital. But with deregulation of interest rates in savings account
some investors might move towards savings account as it offers higher liquidity and
safety to principal amount. The overall corpus might be impacted by reduced
difference between yields of savings account and Liquid Funds.
However, Liquid Funds yields better return considering tax rate into account.
Moreover it also provides dividend option where only dividend distribution tax (DDT)
is deducted by fund houses before the same is distributed. With deregulation, this
category of mutual fund will definitely offer more innovation as Reliance AMC is
already offering Any Time Money Card in collaboration with HDFC Bank.
Thus a normal investor must spread its savings across Liquid Funds and savings
account to get the benefit of both as Liquid fund is an alternate investment avenue
for individuals to park their short term surplus funds. While savings deposits are
easier to access and offer some degree of principal protection, the higher yield
combined with the liquidity and taxation benefits make liquid funds an attractive
option.
K.C.COLLEGE
24
K.C.COLLEGE
25
K.C.COLLEGE
26
The appreciation of the US dollar vis--vis the Indian rupee is providing NRIs with
several opportunities to get more rupees against each unit of their foreign currency
remittance to India.
Banks in India are playing a vital role in channelizing remittances and offering
lucrative options for investment of these funds in India, based on the risk appetite
and return expectations of the NRI customers. Popular option is to invest in low risk
and medium return Term Deposits. These can be rupee deposits like NRE FD and
NRO FD or foreign currency non-resident (FCNR) deposit. Attractive exchange rates
combined with deregulation of interest rates and options such as quarterly & monthly
compounding on non-resident deposits, is dually benefiting NRIs. Further, banks are
also offering the facility to book forward contract on the FCNR deposits for a
maximum of 1 year in order to the increase the overall returns on these deposits.
Various Direct Investment opportunities available with NRI customers include
investment under Automatic Route with repatriation benefits, investment with
Government approval, investments up to 100% equity without repatriation benefits
and other investments with/without repatriation benefits.
NRIs can invest in shares or convertible debentures of listed companies on a
recognized Stock Exchange in India under the Portfolio Investment Scheme
(PIS).Combined with the PIS account, the banks offer value added benefits like an
Online Investment Account for NRI customers to facilitate trading in
shares/debentures of Indian companies, automatic reporting of share trade
transactions and calculation & payment of capital gain tax. NRI investors also have
the option of investment in Domestic Mutual Fund schemes offered by recognized
fund houses in India.
NRIs can leverage opportunities in the booming real estate market in India through
acquisition of immovable property and benefit from the appreciating prices & rental
income in India. To facilitate these property purchases, the banks in India are
offering easy Home loans at competitive interest rates.
The current market dynamics and India's promising growth, the pace of which is
much higher as compared to many developed countries, provide NRIs with
opportunities for both mid-term and long term investments. Fluctuations in returns
are expected within a short term horizon, considering slowdown in the global market
and adversely affected European economies. However, in the long run, India's
growth is expected to be more consistent, being a consumption based economy and
on account of demographic advantage with over 50% of the population in the
working age group of 15-64 years.
K.C.COLLEGE
27
Passport Copy and Resident Visa - copies of these documents duly attested by
Banker/ Notary Public/ India Embassy/ Employer to the satisfaction of the Bank.
Your signature on application form may be verified by anyone of the following:
K.C.COLLEGE
28
NRE
NRI or Person of Indian
Origin
Indian Rupee
Savings, Current, Time
One Year to Three Years
NRO
NRI or Person of Indian
Origin
Indian Rupee
Savings, Current, Time
On par with domestic time
deposit.
Yes, provided joint
Yes, joint holder may be a
account holders is also an resident or a non-resident.
NRI.
Inward remittance from
Inward remittance from
abroad through normal
abroad through normal
banking channel.
banking channel.
Transfer from another
Transfer from another
NRE/FCNR Account held NRE / FCNR Account held
with other branch / Bank. with other branch / Bank.
Personal cheques, drafts
in foreign currency.
29
K.C.COLLEGE
30
Payment of interest:Banks should pay interest on savings deposits and term deposits, including NRE
deposits.
In view of the satisfactory level of computerization in commercial bank branches,
scheduled commercial banks were advised to calculate interest on savings bank
accounts on a daily product basis with effect from April 1, 2010.
A bank must obtain prior approval of its Board/Asset Liability Management
Committee (if powers are delegated by the Board) for fixing interest rates on
deposits.
Such interest should be paid at quarterly or longer rests. Interest on savings bank
accounts should be credited on regular basis whether the account is operative or
not.
K.C.COLLEGE
31
K.C.COLLEGE
32
K.C.COLLEGE
33
Co-operative banks
The RBI has also directed that state co-operative banks and district central cooperative banks (DCCBs) are free to determine their interest rates on NRE and NRO
deposits of one year and above with immediate effect.
Many banks have come out with attractive offers in the past few days. These include
State Bank of India (SBI), ICICI Bank, Kotak Mahindra Bank and Indian Bank. The
aim is to boost foreign currency inflows amid a depreciating rupee.
SBI raised the interest rates on fixed deposits by NRIs of less than Rs. 1 crore with a
maturity of one to two years to 9.25 per cent from 3.82 per cent earlier.
Kotak Mahindra Bank has also hiked interest rates on deposits of one to two years to
9.25 per cent. The latest to join the rate hike bandwagon is ICICI Bank, which raised
the rates by up to 9.25 per cent. Indian Bank has fixed rates on NRE term deposits.
at 9.50 per cent for one year and above up to three years for deposits of less than
Rs.15 lakh, and at 9.25 per cent for Rs.15 lakh and above and up to Rs.5 crores.
K.C.COLLEGE
34
With effect from December 16, 2011, the interest rates are
deregulated. However, interest rates offered by banks on NRE
deposits cannot be higher than those offered by them on
comparable domestic rupee deposits.
Since interest rate of domestic savings deposits was
deregulated w.e.f October 25, 2011, the interest rate on NRE
savings deposits for the period October 25 to December 15,
2011 was as prescribed in the circular 2010-11 at 4% per
annum.
From the close of business in India on November 17, 2005 to
October 24, 2011, the interest rates on NRE savings deposits
should be the same as applicable to domestic savings
deposits instead of the LIBOR/SWAP rate for six months
maturity on US dollar deposits.
(ii) Term
Deposits
K.C.COLLEGE
35
Permitted Debits
Local disbursements.
Remittances outside India.
Transfer to NRE/FCNR accounts of the account holder or any other person
eligible to maintain such account.
Investment in shares/securities/commercial paper of an Indian company or for
purchase of immovable property in India within prescribed regulations.
Any other transaction if covered under general or special permission granted
by the Reserve Bank.
To third party:
The loan should be utilised for personal purposes or for carrying on business
activities (other than agricultural/plantation activities/real estate business).
The loan should not be utilized for re-lending.
K.C.COLLEGE
36
Other Features
Joint Accounts: in the names of two or more Non Resident individuals may be
opened provided all the account holders are persons of Indian nationality or
origin. When one of the joint holder become residents, the authorized dealer
may either delete his name or allow the account to continue as NRE account
or re-designate the account as resident account at the option of the account
holders. Opening of these accounts by a Non Resident jointly with a resident
is not permissible.
An Account may be opened in the name of eligible NRI during his temporary
visit to India.
In cases where the account holder or a bank designated by him has been granted
permission by Reserve Bank to make investments in India, the POA holder is
permitted to operate the account to facilitate such investments. POA holders cannot,
however, make gifts from NRE accounts.
K.C.COLLEGE
37
Non Resident Indians can invest in saving schemes and deposit schemes
of Indian banks through this account.
Loans can be availed from both foreign and Indian banks and the
permissible limit for purpose is quite broad as compared to loans provided
to other accounts.
The balances in these accounts can be transferred to other NRE/FCNR
accounts of the same holder or even to NRE/FCNR accounts of other
NRIs.
Transfer of funds across borders with no cost of transfer
Facilities like payment of bills, cheque books, international credit cards etc
are available in these accounts.
HDFC
HSBC
ICICI
SBI
Axis bank
K.C.COLLEGE
38
Rate of Interest
Existing
Revised
(01-12-11)
after
deregulation
Axis Bank
3.82
6.50
3.51
6.50
3.64
6.50
3.82
6.50
3.82
3.82
3.51
3.51
3.64
3.64
1 Year to 2 Years
3.82
9.00
3.51
8.50
3.64
8.25
3.82
6.50
3.51
6.50
3.82
9.00
3.51
9.00
3.64
8.75
HDFC Bank
ICICI Bank
Yes Bank
K.C.COLLEGE
39
K.C.COLLEGE
40
Save cost, convert your taxable return into TAX FREE return, Limit for
transfer from NRO to NRE but NO Limit for conversion out of NRE.
K.C.COLLEGE
41
Funds deposited in these accounts are not fully repatriable. Interest amount is
repatriable only on payment of taxes and Principal amount is repatriable upto
US $ 1 million per financial year. Thus the funds available in such an account
can be utilized only for making local payments.
The interest earned on these account is taxable in the hands of NRI.
K.C.COLLEGE
42
ADVANTAGE OF DEREGULATION
While inflows in Non-resident (External) Rupee accounts (NRE) have increased
on the back of higher interest rates, the funds in foreign currency non resident
(FCNR) and Non-Resident Ordinary Rupee (NRO) accounts have been falling
because of the interest rate differential.
The Reserve Bank of India (RBI) has deregulated NRE deposits and banks can
now offer interest rates on NRE deposits on par with domestic deposits of same
maturity. Interest rates on NRE accounts have increased by 500-600bps since the
announcement made on December 16, 2011. Interest rates on FCNR dollar
deposits that are still regulated are around 2-2.5 per cent, while banks are taking
NRE deposits at 9-10 per cent.
In aggregate, there has been a dip in the foreign currency and NRO accounts.
Some premature withdrawal pressure on FCNR accounts could not be ruled out.
Bankers have suggested to the central bank that deregulation be allowed in
foreign currency accounts, too. However, the central bank is not believed to be
convinced with the idea, as higher accretion in FCNR deposits would only
increase forex liability of Indian banks.
While funds can be transferred from foreign currency accounts into NRE accounts,
the same cannot be followed for NRO accounts. In case of NRO accounts, fresh
flows have been diverted. There has been a shift in remittance flows from NRO to
NRE accounts after the interest rates on the latter were increased. The bank has
raised rates twice since deregulation.
These Flows are largely from the US, Europe and the Gulf. However, high net
worth NRIs are largely from the US and Europe.
If this continues, it may put redemption pressure on banks as people would
withdraw prematurely from FCNR accounts to take advantage of higher interest
rates in NRE accounts. Converting the existing NRE/FCNR deposits will lead to
loss of interest for period of investment. If the loss on account of premature
closure is compensated on the new deposits, there will be pressure on premature
closure.
K.C.COLLEGE
43
DISADVANTAGE OF DEREGULATION
The biggest fall back is the exchange rate risk. Rupee as a currency has
shown it weakness in Nov-December 11 periods. Expert say it will take time
before it goes into stable range. The rupee depreciation will be beneficial
when you are getting funds in India as you will get more rupee per unit the
foreign currency and vice versa. The recent volatility as Depositor has to face
this during the time he is invested.
Although the returns on FCNR and NRE are tax free in India but they are
taxable as per the structure of the country where NRI lives. This can be as
high as 55% for some countries and this will bring the actual returns lower.
For this please consult the tax advisor before investing in India.
The rules and caps over investments in foreign currency keep on changing on
frequent basis. These rules are covered in various acts like RBI Regulations,
FEMA and different banking regulation acts and guidelines. NRI needs to be
proactive and informed in this matter.
K.C.COLLEGE
44
INTERNATIONAL EXPERIENCES
This section provides a summary of the experience on 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. Most savings
bank accounts may carry customer charges if the number of transactions exceeds
the permissible level.
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.
Although several countries deregulated interest rates on savings bank deposits long
ago, Hong Kong did so recently and may particularly be relevant for India. 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. This involved the removal of the interest rate
cap on savings accounts and the prohibition of the payment of interest on current
accounts. In response to the deregulation, a number of banks launched new
products such as combined savings and checking accounts and Hong Kong interbank 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. He also showed that the adjustments in
retail bank deposit rates were asymmetric and rigid upwards during the regulated
period, but tended to be rigid downwards during the deregulated period. The spreads
between retail bank deposit rates and market rates also narrowed sharply after the
removal of interest rate controls.
Rates on savings accounts in China are regulated by the Peoples Bank of China,
which specifies ceiling interest rates on these accounts. Currently, the cap is at 0.5
per cent per annum. The account provides easy access to deposited funds. Interest
rates are calculated on a daily product basis. The savings account comes with a
choice of either a passbook savings or a statement savings account. There is no
charge for the transactions carried out in the savings account and the minimum
balance in these accounts is very low at RMB 1.
K.C.COLLEGE
45
Following deregulation in Taiwan, a fee is charged for each transaction. 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 if
the minimum balance is less than stipulated. The account also carries monthly
charges for operating the account.
In countries in which financial sector reforms also included interest rate deregulation,
the action was primarily taken because real rates were negative, and was being
propelled by inflationary pressures. The most immediate result of financial
deregulation in these select Asian economies was the enhancement and
maintenance of positive real interest rates, which, in turn, contributed to an increase
in financial savings. It also forced a diminution in the financial market segmentation
exemplified by smaller dispersion of interest rates. The deregulatory process on the
interest rate structure combined with the central banks credible monetary policy
measures for anchoring inflation expectations led to positive real rates of interest at
least temporarily for Asian countries, viz., Indonesia, Malaysia and the Philippines,
although only the first two countries sustained a positive real interest rate structure.
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. Banks generally offer variable interest
rates on savings deposits. Savings bank deposits have similar characteristics such
as simple procedures with no limit on the length of the maturity. Further, there is a
low or no minimum amount for opening of the savings accounts and banks generally
charge fees for various services offered to the depositors.
K.C.COLLEGE
46
CONCLUSION
The process of deregulation, which began in the early 1990s, was largely completed
by 1997. A few categories of interest rates that continued to be regulated were small
loans up to 2 lakh and rupee export credit on the lending side, and savings deposit
interest rate on the deposit side. The 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. The only
interest rate that continued to be regulated was the savings deposit interest rate.
Deregulation of interest rates in India since the early 1990s has improved the
competitive environment in the financial system, imparted greater efficiency in
resource allocation and strengthened the transmission mechanism of monetary
policy.
Regulation of savings deposit interest rate had imparted rigidity as savings deposit
interest rate had not been changed since March 1, 2003 although other interest rates
have moved in either direction. Interest rate paid on savings deposits was lower
than those on term deposits of all maturities, other than for term deposits at very
short end for a brief period.
The empirical evidence suggests that unlike metropolitan areas, savings deposits in
rural, semi-urban and urban areas were responsive to interest rate changes in
savings deposits. Therefore, market-based interest rate had been beneficial to
savers. Since savings deposit is a hybrid product which combines the features of
both current account and term deposit, a market based rate of interest on this
product has the potential to attract large savings from low income households.
Deregulation allowed banks to introduce product innovations which could also
benefit the depositors. Deregulation has another major advantage in that it will help
improve the monetary transmission.
However, some concerns have also been raised with regard to deregulation of
savings deposits interest rate. Savings deposits have been a source of cheap funds
for banks. This is reflected in the low cost of deposits in respect of those banks
which hold relatively high proportion of CASA deposits (a major portion of which is
savings deposits). In addition, banks treat a large portion of savings deposits as
core deposits, which has been used to finance long-term assets. However,
distribution of savings deposits is skewed among banks with some banks enjoying
relatively high share of savings deposits than others. It has also been observed that
a large number of banks (accounting for about half of the size of the banking sector)
hold CASA deposits lower than the average CASA deposits. In view of this pattern,
banks have often raised the concern that deregulation may lead to an unhealthy
competition. This, in turn, it will result in large shift of deposits from some banks
exposing them to a serious risk of asset-liability mismatch.
K.C.COLLEGE
47
However, analysis of interest rates on term deposits after they were deregulated did
not result in any unhealthy competition amongst banks. Although spreads (the
difference between the term deposits interest rate over the relevant policy rate)
tended to widen somewhat in a deregulated environment in comparison with when
interest rates were regulated, this was not unusual as similar or somewhat higher
spreads were observed in recent years. Thus, if deregulation of term deposits did not
lead to any unhealthy competition, deregulation of savings deposit rate also not
result in any unhealthy competition.
The experience with deregulation of term deposits interest rate also suggests that
deregulation resulted only in a marginal shift of deposits from public sector banks
and foreign banks to private sector banks. Thus, if deregulation of term deposits
interest rate is any guide, deregulation of savings deposit interest rate may not result
in an unhealthy competition and a large shift of deposits from one bank to another,
thereby destabilizing the system. Further, the Reserve Bank has deregulated the
entire asset side and bulk of liability side of banks balance sheets. In such a
scenario, continuing regulation of savings deposit interest rate leads to distortions in
the system, which needs to be avoided.
Concerns have also been expressed with regard to the interests of low income
households in a deregulated environment. There is a risk that in a deregulated
environment when the cost of maintaining such deposits becomes high, banks may
introduce such features as may prevent small depositors from accessing such
accounts. While attractive returns may encourage low income households to open
such accounts, it may also reduce accessibility of such accounts for small savers if
banks impose some restrictions on the operation of such accounts. However, such
issues are better addressed by regulatory prescriptions rather than by regulation of
interest rates.
In sum, deregulation of savings deposit interest rates has both pros and cons.
Savings deposit interest rate cannot be regulated for all times to come when all other
interest rates have already been deregulated as it creates distortions in the system.
International experience suggests that in most of the countries, interest rates on
savings bank accounts are set by the commercial banks based on market interest
rates. Most countries in Asia experimented with interest rate deregulation to support
overall development and growth policies. These resulted in positive real interest
rates, which in turn contributed to an increase in financial savings. Deregulation of
savings bank deposit interest rate also led to product innovations.
K.C.COLLEGE
BIBLIOGRAPHY
http://www.investmentyogi.com/spending/the-impact-of-savings-accountderegulation.aspx#
http://www.dnaindia.com/money/report_decoding-savings-rate-deregulation-andhow-it-impacts-liquid-funds_1606196
http://www.scribd.com/doc/70909913/Why-Are-SB-Interest-Rates-DeregulatedVRK100-30Oct2011
http://www.mbaskool.com/business-articles/finance/241-savings-bank-accountinterest-rate-pros-cons.html
http://tips.thinkrupee.com/articles/non-resident-external-nre-rupee-account.php
http://rbidocs.rbi.org.in/rdocs/Content/PDFs/DPS270411F.pdf
http://www.ninemilliondollars.com/2012/09/basic-difference-between-nre-and-nroaccount/
http://www.centralbankofindia.co.in/site/MainSite.aspx?status=2&menu_id=91
The times of India
K.C.COLLEGE
48
49
ACKNOWLEDGEMENT
K.C.COLLEGE