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‡ Deregulation of deposits and lending rates

‡ Both deposit and lending rates are prescribed by

RBI. Normally, change in the Bank Rate is expected
to lead to appropriate changes in all market rates of
interest and help to achieve the given objective of
monetary action±

  


‡ It will lead to ruthless competition & create

uncertainty in market.

‡ The minimum savings bank deposit required to

break even could be double the current amount.

‡ The behavioral pattern of CASA can change & create

asset- liability mismatch.
‡ Highly vulnerable to liquidity in the system. At a time
when liquidity is very tight in the system, deregulation of
savings deposit rate is likely to create a lot of uncertainty and a
sharp increase in savings deposit rates. In the near term this
will prevent RBI to de-regulate saving deposit rates.

‡ Deregulation of savings deposit rates will impact

profitability further± Cost of doing banking business in India is
very high, considering the high reserve requirements - Cash
reserve ratio (currently at 6% of deposits; zero yield) and
statutory liquidity ratio (currently at 24%; low yield) - and high
priority-sector lending requirement of 40% (low loan spreads
and higher credit cost).

 


‡ Inflation in India has averaged at 5%+ in the last

five years. Savings deposits effectively yield
negative earnings for customers.
‡ Any increase in cost of deposits automatically gets
transmitted into higher lending rates, thus
protecting margins
‡ Increased competition may result in increased
emphasis on technology & Customer Service.
  

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‡ RBI¶S upcoming discussion paper will clarify its

stand.
‡ It is likely that in a low interest environment the
rates could also go down if there is no base
minimum rate that needs to be paid.
‡ RBI may keep the saving rates regulated with
increased rate ( 50 bps to 100 bps)
‡ After Deregulation banks will charge for other
services ( e.g. ATM) offered
‡ Difficult to predict Timeframe for implementation of
deregulation


 

‡ Create proper guidelines to service retail accounts

‡ Policy should be laid down to avoid discrimination in
interest rates among different client.
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