P R E S E N T E D B Y A L O K K U M A R S E C T I O N - C

A deposit account held at a bank or other financial institution that provides principal security and a modest interest rate

Most liquid investments outside of demand accounts and cash

Combination of current account and term deposits.

An interest rate is the cost of borrowing money

The interest a lender receives is his compensation for taking a risk

interest rate is your compensation for temporarily giving up the ability to spend your cash

Interest rate for secured credit and unsecured credit

March 2, 1978 – Interest rate @ 4.5 % p.a.

April 24, 1992 – Interest rate @ 6.0 % p.a.

March 2003 – Interest rate @ 3.5 %

Presently 4 @ p .a.

Interest Rates for Savings Bank Deposit vis-à-vis Select Term Deposits

Note : Data pertain to 5 major public sector banks

It means it will not be under control of RBI anymore. The interest rates will differ for each bank. The banks will decide the interest rates based on their financial condition and other factors. The deregulation puts more competition among the banks to attract more savings bank account holders.

As a part of financial sector reforms, the Reserve Bank has deregulated interest rates on deposits, other than savings bank deposits. The interest rate on savings bank deposits has remained unchanged at 3.5 per cent per annum since March 1, 2003.

Early 1990’s – India pursued financial sector reforms as a part of structural reforms

April 1992 – Single ceiling rate of 13% for all deposits above 46 days

November 1994 – Ceiling rate was brought down to 10%

October 1995 – Banks were allowed to fix interest rates on deposits with maturity of over 2 years

The process of deregulation started in October 1997

Deregulation – prior to this the interest rate was 3% to 4%

As a result of deregulation the interest rates are higher for deposits of more than Rs 1 lakh

October 1997 – Deposits rate were fully deregulated by removing the linkage to Bank rate

April 1998 – RBI gave freedom to commercial banks to fix their own interest

Strengthen the competitive forces

Improve alocative efficiency of resources

Strengthen the transmission of monetary policy

Product innovation

Price discovery

PROSMay Enhance Attractiveness of Savings deposite

Will Improve Transmission of Monetary Policy

May lead to product innovation such as branches, ATM etc

CONS Possibility of an Unhealthy Competition

Risk of Asset Liability Mismatches

May Lead to Financial Exclusion

Could Adversely Affect Small Savers/Pensioners

Possibility of Introduction of Complex and not so Easily Understood Savings Products

DEREGULATION IMPACT ON BANKS

Increased costs and decreased profitability

Less takers for short term fixed deposits

Increased competition

Asset and liability of banks 22

DEREGULATION IMPACT ON DEPOSITERS

Higher earnings from saving accounts

Short term investment option

Increased cost of loans for borrowers

Increased charges

IMPACT ON LIQUID FUNDS

Liquid funds are mutual funds

Some investors might move there funds towards savings account as it offer higher liquidity and safety of the principle amount

liquid funds yield better returns if we take tax rate into account

With deregulation, this category of mutual fund will definitely offer more innovation

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 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

Deregulation of interest rates on savings bank account will only prompt customers to move from one bank to another, rather than bringing in new customers into the banking system

Banks wishing to enjoy cheaper (savings bank) funds will, therefore, have to work much harder on non-interest factors like service quality, ease of access and other related services on offer to retain customers and ensure their loyalty

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