Money lying idle in savings accounts to fetch more now :- ‘Savings rate deregulation by RBI'

The money lying idle in your bank account will now fetch you more returns, with the Reserve Bank of India completely deregulating interest rates on Tuesday. Thesavings or the SB account, which fetched account holders a measly 4%, was the last bastion of administered pricing imposed by the banking regulator and sets the stage for competition among banks to attract more deposits by offering attractive interest rates to consumers.
The new system comes into effect immediately and would replace the existing one, which has been in place since 1978.
Within hours of the policy, private sector player, Yes Bank, increased the return on itsSB accounts to 6%. Other banks with a relatively lower share of retail deposits such as IDBI Bank and Kotak Bank may follow suit in a bid to poach customers fromrivals. Although the small banks lack the distribution network, they are likely to playthe upstart by targeting salary accounts with the larger banks.
Banks may have 2 sets of deposit rates
Larger banks will not be able to respond selectively to Reserve Bank of India's complete deregulation of interest rates on Tuesday as the central bank has made it clear that the savings rate has to be uniform across customers. However, banks can have two set of rates - one for deposits below Rs 1 lakh and another for those with larger deposits.
"We have not set any parameters for the savings deregulation as we wanted banks to devise their own schemes and compete in the best interest of the customers and the country," said D Subbarao, governor, RBI. The governor admitted that deregulating the savings rate would help RBI in its fight against inflation as higher rates would be passed to customers who would be encouraged to save more and spend less.
Although banks with a low retail base are celebrating, the larger banks have been strongly opposed to the move. Most of the large banks had responded to RBI's discussion paper.
On deregulation by stating that the current environment of rising interest rates was aninopportune time to deregulate. "We are not in a hurry to raise savings deposit rates.We would rather see how it plays out...eventoday depositors have the advantage of getting higher returns through sweep accounts. Unless there are competing pressures we are not looking at raising rates now." Pratip Chaudhuri, chairman, State Bank of India, said.
Deregulation will put pressure on bank margins with average interest rates on savings account expected to go up by 50 to 100 basis points (a basis point is a hundredth of a percentage point). RBI's action has taken banks by surprise and their stocks lost considerably in a rather buoyant market. In their meeting with RBI governor D Subbarao chairmen of large banks had questioned why the deregulation was not done in a phased manner.
In reality, as pointed out by the large banks,depositors already have several options for getting a better returns on their savings. For instance, any depositor with a significant balance in a new generation bank can open a 'sweep account' which is nothing but a unitized fixed deposit accountwhere the deposit can be broken in parts and the amount credited to the customers account whenever he needs them.
There are also liquid funds where funds can be deployed and withdrawn at will. However, there continues to be a large section of customers who are either not sophisticated enough or not active or simply too conservative to try a higher yielding option. These borrowers will be themain gainers.