Wednesday, December 14, 2011

Savings rate at 6% : Boon or bane?

How it affects the economy, broadly
Prior to the deregulation, savings rate had been changed only 3 times since 1978; the
rate being fixed at 3.50% from March 2003 to March 2011. Frequent changes in the repo
and reverse repo rates resulted in a huge difference between term deposit rates and
savings deposit rates, despite the fact that 69% of the total accounts held with banks in
2006 were savings accounts. The banks primarily used the funds acquired via savings
accounts to lend at a much higher rate of interest and thus earned profits. However, due
to the increasing differences in interest rates of savings accounts and term deposits, the
proportion of savings accounts began to decline.

The deregulation of savings deposit rates is thus an effort on the part of the Central
bank to ensure that savings accounts remain an important component of the financial
system and that the depositors are offered a much highest return on their savings
account in an era when repo rate is as high as 8.50%. The deregulation would not only
ensure that savings deposit rates move in line with other key rates as the repo rate
but also stimulate competition among commercial banks to raise funds at low cost (via
savings accounts), by offering higher interest rates on savings accounts.

However the deregulation has had its own disadvantages. The Net Interest Margins
(NIM) of banks have declined, as banks have increased savings rates, with some banks
like Yes bank increasing them to as high as 6%. Experts believe that as costs of fund
acquisition for banks rise, further rise in interest rates on loans will be witnessed, which
in effect will harm growth in an era when Industrial production of the economy has fallen
by as much as 5.1%.

In retrospect, banks need to exercise caution to ensure that the depositors are
benefitted with higher savings rates, without having an adverse effect on the growth of
the economy.

Narotam Garg | Guest Editor

2 comments:

  1. When I go over budget I've been taking money out of my emergency fund to cover these expenses. Obviously, these little overages are not emergencies.

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  2. 6% is really big and it's impossible for any bank to give a 6% on their customers , even when they're hefty rich. Banks just can't give a deposit interest.

    ReplyDelete