SBI and HDFC Bank which are the 2 of the largest banks in the country have protested against the RBI proposal to free up the interest rate given on savings account in India.Note RBI fixes the rate at which money deposited in saings account earns interest currently for all banks in India.The current rate is 3.5% which is way below the near double digit inflation rate being experienced in India.Most Indians deposit their savings in bank saving and fixed deposit accounts as there is no widespread equity or debt investment culture in the country.This allows banks with a large retail depositor base to earn supernormal profits by paying pathetic interest rates on savings account and lending that money at 12-13%.While the public sector banks have to serve a lot of priority sectors private banks have no such concerns.This leads to high NIM for private banks leading to huge profit growth each year.This has made investing in  top banks in India such an attractive proposition.

The largest banks with the highest CASA deposits have the greatest to lose from the liberalization of the savings rate.Smaller banks will offer higher interest rates to lure customers from these big banks who will lose their captive cash cow.SBI which is the largest bank has the most to lose,even HDFC Bank which is amongst the top 2 private banks in the country has a great deal to lose.So it is not surprising that these banks are at the forefront of the protests against this move.Generally companies are in favor of deregulation but note it is only when it leads to greater profits.Like the infamous Bombay Club led by Bajaj which wanted liberalization of the 90s to be rolled back,its a sorry move by these banks.

Savings accounts to offer higher interest?

On Thursday, the central bank floated a discussion paper highlighting the pros and cons of deregulation, seeking public opinion on whether rates should be freed. The central bank has also pointed out that real interest rates — interest rates adjusted for inflation — have been largely negative for savings account holders. It said that savers would benefit from deregulation as rates are likely to rise. It has also said that freeing of interest rates would improve transmission of monetary policy by pushing up interest rates on savings accounts whenever the central bank raised policy rates.

In the past Aditya Puri, MD, HDFC Bank, and Shikha Sharrma, MD, Axis Bank, had said that savings rate should not be deregulated when there is a liquidity shortage and interest rates are rising. Former SBI chairman O P Bhatt had also said that deregulation would not benefit small depositors as banks that offer high interest rates would also seek a higher minimum balance to make up for transaction costs. Similarly, former RBI governor Y V Reddy was strongly opposed to savings rate deregulation stating that common people don’t have time to apply their mind and shift money from one account to another and was strongly in favour of a uniform savings rate.