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INDEX

SR. NO.

PARTICULARS

PAGE
NO.

EXECUTIVE SUMMARY

MEANING OF DEREGULATION OF INTEREST RATE

HISTORY

SAVINGS DEPOSITS

10

FEATURES OF SAVING DEPOSITS

11

CONDITIONS OF RBI ON DEREGULATION

12

IMPACT ON BANKS

13

EXPECTED RESULTS OF THE DEREGULATION

16

ADVANTAGES OF DEREGULATION

18

10

DISADVANTAGES OF DEREGULATION

22

11

NON RESIDENT INDIANS

12

DEREGULATION ON NRE AND NRO DEPOSITS

29

13

NON-RESIDENT (EXTERNAL) (NRE) ACCOUNTS

31

14

ORDINARY NON RESIDENT (NRO) ACCOUNTS

39

15

ADVANTAGE OF DEREGULATION

42

16

DISADVANTAGE OF DEREGULATION

43

17

INTERNATIONAL EXPERIENCE

44

18

CONCLUSION

46

19

BIBLIOGRAPHY

48

20

ACKNOWLEDGEMENT

49

25

DEREGULATION OF INT. RATE

EXECUTIVE SUMMARY
Reserve Bank of India has given freedom to banks to set their own interest rates on
Savings Bank deposit accounts. Till now, SB deposit interest rates were decided by
RBI and banks offered RBIs uniform rate to SB accountholders. On 25 October
2011, RBI announced deregulation of SB interest rates with immediate effect. The
same day, Yes Bank raised its interest rate on SB deposits by 200 basis points (or
two per cent) to six per cent.
While the RBI had deregulated interest rates on fixed deposit schemes in 1997, it
continued to fix the rate on savings bank deposits till 2011. The interest rate on
savings bank deposits had remained unchanged at 3.5 per cent since March 1,
2003.
RBIs deregulation drive on saving interest rates has created a competitive
environment across banks in an effort to retain and capture a loyal customer base.
The second quarter of the monetary policy review instructed banks to implement
deregulation of savings bank rates, allowing banks to set their own interest rates.
The deregulation took place because 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 rate of interest in savings bank account was 4% per annum as mandated by the
government in May 2011. However with the change banks are now allowed to fix
their interest rates for saving account customers.
Banks now use this as a competing factor and weave it into their merits to enhance
their customer base.
The savings account holders have maximum benefits for their money irrespective of
the time period. Before deregulation there was hardly any competition in this
segment, and all banks offered the same rate of interest. So, there were no second
thoughts for customers about shifting their savings account from one bank to
another. However, now customers think twice before they start a new account or
wish to switch an existing account to get the maximum benefits.
The deregulation resulted in positive real interest rates, which in turn contributed to
an increase in financial savings. Deregulation of savings bank deposit interest rate
also led to product innovations. 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.

K.C.COLLEGE

DEREGULATION OF INT. RATE

International experience suggests that in most countries, interest rates on savings


bank accounts are set by commercial banks based on market interest rates.
The saving A/C interest rate in the economy has been deregulated by the Reserve
Bank of India (RBI). This means that the interest rate that the banks can offer to their
customers for maintaining balances in the saving account can vary depending upon
the situation that the banks find themselves in. There will not be any fixed rate that
would have to be offered to the customers. It has to be remembered that for a long
period of time, the savings bank interest rate was fixed at 3.5 per cent and this was
then increased to 4 per cent. Now with no such restriction present; the bank has the
right to fix a rate that they consider appropriate and hence the individual could gain
from this particular situation.
After the deregulation, several banks have announced higher rates on their savings
bank accounts and these have gone up to 6 per cent. Few banks have a structure
whereby a higher rate is offered for amounts that exceed Rs 1 lakh in their accounts.
This is a high figure and hence the individual could ensure that he is earning this
higher amount even if his money is doing nothing but just lying in the saving account
without any use at all. This has an impact on the overall decision making process as
to where the amount should be invested.
The move to free the savings rate now means more competition for mutual funds
because they would now compete for the same money for their liquid fund
investments. Earlier the situation was clear as the liquid funds held an advantage as
far as the returns were concerned because of the fact that when the return on the
savings account was 3. 5 or 4 per cent; it was most likely that the liquid funds would
deliver something that was higher than this figure. Now this might not be the case so
the individual would also need to take a decision as to what he should be doing in
terms of allocation of the amounts available with him.
When the interest rate on saving A/C was lower, there was a very good chance that
the liquid funds would actually deliver a higher return than the amount lying in the
account. Even if things were not so well and the liquid fund delivered a 5 per cent
return for a specific period then the situation was still in favor of the liquid fund as the
figure was higher than the saving account interest. On the other hand, the tables
have turned now as doing nothing might actually turn out to be better because of the
fact that this might actually guarantee something like 5-6 per cent.
Now the pressure is on the liquid fund to generate returns that will match and exceed
this figure and hence the individual would have to be careful when he is making the
investment decision. There could also be a situation where the liquid funds could
actually improve their performance and try to offer a higher return but this is limited
to the conditions that are prevailing in the debt market for this kind of short duration
instruments. There have been times when the liquid funds have generated 6.5-7.5
per cent returns but on the whole the situation will be beneficial for the investors.
K.C.COLLEGE

DEREGULATION OF INT. RATE

MEANING OF DEREGULATION OF INTEREST RATE


Deregulation is an act by which the government regulation of a particular industry is
reduced or eliminated in order to create and foster a more efficient marketplace.
Deregulation is usually enacted to weaken government influence and forge greater
competition. By this token, deregulation also creates an economic environment
favorable to upstart companies that were unable to enter the industry prior to the
passing of deregulation. It is also widely held that deregulation often serves as a
catalyst for increased innovation and mergers among weaker competitors.
Deregulation is often driven by lobbyists and lobbying groups that represent various
industries and business interests.
As banking sector regulator, Reserve Bank of India used to set interest rates for
deposits and all banks used to offer uniform rates to depositors depending on
maturity periods. Deregulation is nothing but giving more freedom to banks to offer
their own rates. Allowing banks to have more autonomy, RBI had undertaken the
process of deregulation and started giving freedom to banks to offer their own rates
in 1992. Except Savings Bank deposit interest rates, all the deposit rates were
deregulated by RBI in 1997.On the lending side, the rates on small loans up to Rs 2
lakh and rupee export credit were deregulated in July 2010.
The deregulation of the saving interest rate means that one of the significant aspects
of managing funds for individuals could now become easier than ever before. It also
means that the investor could find that a category of funds that are used by him to
park his very short term funds in the form of liquid funds could no longer retain the
charm under all market conditions. A clear relook at the entire situation will enable
him to put the money away in an effective manner.

K.C.COLLEGE

DEREGULATION OF INT. RATE

MEANING OF DEREGULATION TO DEPOSITORS


As a common man, the deregulation move is definitely going to have an impact on
each and every one in some way or the other.

On the brighter side deregulation would mean:

Higher earnings from saving accounts:


With banks having no restriction on the interest rate, the savings account
could fetch you better returns. Higher interest makes them more attractive
now, with more value for your money.

Short term investment option:


Investors looking out for short term investment avenues would now find the
savings account a safe haven. High liquidity, better interest and of course the
lack of volatility, makes them a good short term investment pick.

Increased cost of loans for borrowers:


Current account and savings accounts funds are used by banks, to lend to
borrowers at higher interest rates. A major portion of the banks income comes
from this interest rate difference. Increasing the savings account interest rate
would mean banks would need to increase the loan rates too, in order to
maintain a decent interest spread. Such hike in loan rates would have to be
borne by borrowers.

Increased charges:
The additional interest expenses on the savings account borne by the bank
may be passed on to customers in the form of charges on transaction or ATM
usage.

K.C.COLLEGE

DEREGULATION OF INT. RATE

HISTORY OF DEREGULATION OF INTEREST RATE IN INDIA


The process of deregulation of deposit interest rates had begun in the 1980s. In April
1985, banks were allowed to set interest rates for maturities between 15 days and up
to 1 year, subject to a ceiling of 8 per cent. It was expected that with reasonable
rates of interest on maturities, banks would be able to achieve a better distribution of
term deposits rather than highly skewed distribution around longer maturities at
relatively higher costs. However, when a few banks started offering the ceiling rate of
8 per cent even for maturities of 15 days, other banks followed suit without regard to
consideration of profitability and set a single rate of 8 per cent for maturities starting
from 15 days and up to one year. The consequence was a shift of deposits from
current accounts and, to a lesser extent, from savings accounts to 15-day deposits.
As a result of price war among banks, the freedom to set interest rates subject to a
ceiling was withdrawn in May 1985. The process of deregulation resumed in April
1992 when the existing maturity-wise prescriptions were replaced by a single ceiling
rate of 13 per cent for all deposits above 46 days. The ceiling rate was brought down
to 10 per cent in November 1994, but was raised to 12 per cent in April 1995. Banks
were allowed to fix the interest rates on deposits with maturity of over 2 years in
October 1995, which was further relaxed to maturity of over 1 year in July 1996. The
ceiling rate for deposits of 30 days up to 1 year was linked to the Bank Rate less
200 basis points in April 1997. In October 1997, deposit rates were fully deregulated
by removing the linkage to the Bank Rate. Consequently, the Reserve Bank gave the
freedom to commercial banks to fix their own interest rates on domestic term
deposits of various maturities with the prior approval of their respective Board of
Directors/Asset Liability Management Committee (ALCO). Banks were permitted to
determine their own penal interest rates for premature withdrawal of domestic term
deposits and the restriction on banks that they must offer the same rate on deposits
of the same maturity irrespective of the size of deposits was removed in respect of
deposits of ` 15 lakh and above in April 1998. Now banks have complete freedom in
fixing their domestic deposit rates, except interest rate on savings deposits, which
continued to be regulated and is currently stipulated at 3.5 per cent.
The issue of deregulation of savings deposit interest rate has arisen from time to
time. The Annual Policy Statement of 2002-03 had weighed the option of
deregulation of interest rate on savings bank deposit accounts but the time was not
considered opportune considering that a large portion of such deposits was held by
households in semi-urban and rural areas. It was, however, argued that deregulation
would facilitate better asset-liability management for banks and competitive pricing to
benefit the holders of savings accounts.
The issue was again revisited in the Annual Policy Statement for the year 2006-07.
In this context, the Indian Banks Association (IBA) while making out a case for
deregulation of savings bank deposit rates in the long run, suggested for status
quo in 2006. The Reserve Bank on a review of the then prevailing monetary and
interest rate conditions, including a careful assessment of the suggestions received
from the IBA, considered it appropriate to maintain the status quo, although the
Policy stated that in principle, deregulation of interest rates is essential for product
innovation and price discovery in the long run.
K.C.COLLEGE

DEREGULATION OF INT. RATE

In pursuance of the announcement made in the Annual Policy Statement for the year
2009-10, the Reserve Bank advised scheduled commercial banks to pay interest on
savings bank accounts on a daily product basis with effect from April 1, 2010. Prior
to the introduction of a daily product method, the interest on savings deposit account
was calculated based on the minimum balance maintained in the account between
the 10th day and the last day of each calendar month and credited to the depositors
account only when the interest due was at least ` 1/- or more. After the change, the
effective interest rate on savings bank deposits increased, thereby benefitting the
depositors.

K.C.COLLEGE

DEREGULATION OF INT. RATE

POST DEREGULATION
Post deregulation, the banks will be free to fix the interest rates on saving deposits. It
will be decided by the market interest rates which in turn will be decided by the
overall liquidity situation in the market and that of the bank.
Though the market interest rates have fluctuated over a period of time, interest rates
on saving bank deposits have remained unchanged at 3.5 % pa since March 1,
2003. The interest rate on saving bank deposits was less as compared with interest
rates on term deposits of one month and above. Considering that 22% of the bank
funds come from these deposits, banks benefited by this low interest rate.
Amount lying in savings account can be bifurcated into (a) amount kept for
transaction purpose and (b) saving component.90% of the amount in savings deposit
is held for saving purposes. Even though the tenure of such savings is not easily
determinable, it can be safely assumed that it can be more than 1 - 1.5 months on an
average and warrants more interest rate.
Thus, once the deregulation takes place, one can expect overall increase in saving
deposit rate. However, there might be period during which overall liquidity situation is
in surplus and banks are able to procure cheaper funds. During such periods, saving
deposit rate may get reduced and can even be lower than 4% p a. The probability of
occurrence of such instances will be rare and for short period of time frame.
Once deregulation was in effect, banks needed to compete and scramble for saving
deposits. In such competitive landscape, banks introduced customized and complex
products to attract customers. It can be a combination of savings and current
account, or combination of savings and fixed deposits. It offered layered interest
rates where interest rate depends on the quantum of funds lying in savings account,
with higher the amount, higher the rate. One needed to see the suitability of such
products before opting for any of them.
Further, since higher rate had an impact on the profitability of banks, people needed
to be ready to pay for services available from bank. Thus banks started charging, in
case not already charging, or increase the charge for withdrawals in excess of
maximum permitted within a specified period. They charged people to issue cheque
books, charge in case visit their branches or charge for making a phone call and
speaking with their customer care representatives. All this will lead to increase in
bank charges.

K.C.COLLEGE

DEREGULATION OF INT. RATE

DEFINITIONS
(a) Demand deposit means a deposit received by the bank, which is withdrawable
on demand.
(b) Savings deposit means a form of demand deposit which is a deposit account
whether designated as Savings Account, Savings Bank Account, Savings
Deposit Account or other account by whatever name called which is subject to the
restrictions as to the number of withdrawals as also the amounts of withdrawals
permitted by the bank during any specified period.
(c) Term deposit means a deposit received by the bank for a fixed period and which

is withdrawable only after the expiry of the said fixed period and shall also include
deposits such as Recurring/Cumulative/Annuity/Reinvestment deposits, Cash
Certificates, and so on.

K.C.COLLEGE

DEREGULATION OF INT. RATE

10

SAVINGS DEPOSITS
A savings deposit is a hybrid product which combines the features of both a current
account and a term deposit account. While a current account is primarily meant for
transaction purposes and is maintained by companies, public enterprises and
business firms for meeting their day-to-day requirement of funds, savings accounts
are maintained for both transaction and savings purposes mostly by individuals and
households. A savings account being a hybrid product provides the convenience of
easy withdrawals, writing/collection of cheques and other payment facilities as well
as an avenue for parking short-term funds which earn interest.

Trend in Savings Bank Deposits in India


Savings deposits are an important component of bank deposits. The average annual
growth of savings deposits, which decelerated in the 1990s as compared with that of
the 1980s, accelerated sharply in the decade of the 2000s. In this decade, the
average growth rate of savings deposits exceeded that of both demand deposits and
term deposits, notwithstanding the growth in term deposits outpacing that of savings
deposits during the period 2005-10.
Savings account penetration (number of savings accounts for 100 persons), which
remained broadly unchanged between March 1996 and March 2005, increased
significantly by March 2009. Per capita savings bank deposits also increased
from `1,067 in March 1996 to ` 7,767 for March 2009. However, in recent years, the
growth in per capita savings deposits was lower than that of aggregate deposits as
reflected in the decline in the ratio of per capita savings deposits and per capita
aggregate deposits (11. As expected, data on the ownership pattern of savings
deposits during 1998-2009 reveal that savings deposits are predominantly held by
the household sector.
An analysis of distribution of savings deposits by population groups reveals that
between 2000 and 2009, savings deposits held in rural and semi-urban areas
declined sharply, while those held in metropolitan areas increased. In 2009, the
share of savings deposits held in metropolitan areas was more than that held in rural
and semi-urban areas.
To sum up, savings deposits are held largely by households. Savings deposits are a
popular product and they constitute about 22 per cent of total deposits of scheduled
commercial banks and about 13 per cent of financial savings of the household
sector.

K.C.COLLEGE

DEREGULATION OF INT. RATE

11

FEATURES
The operation of a savings bank account differs from bank to bank. However, still
some broad features could be identified:

One, number of free withdrawals is generally stipulated on a halfyearly/quarterly basis. Total numbers of withdrawals vary between 30 and 120
per half year.

Two, no ceiling has been stipulated on the maximum amount that can be
drawn per transaction.

Three, there is generally no limit on the number of cheques that can be drawn
per month. However, some PSBs have restricted the number of cheques that
can be drawn on about 20 to 25.

Four, minimum balance is stipulated, irrespective of whether the account


holder is with or without cheque facility. The public sector banks have
stipulated the minimum balance amount at `1000 for metro, urban and semiurban areas and `500 for rural areas with cheque book facility. The minimum
balance amount stipulated without cheque book facility is ` 500 for
metro/urban/semi-urban areas and ` 250 for rural areas. The minimum
balance required to be maintained by private sector and foreign banks is
generally much higher than those by public sector banks.

IMPORTANCE OF SAVINGS BANK DEPOSITS TO THE ECONOMY


Household financial assets are 10.4 per cent of Indias GDP (2008-09). Share of SB
deposits is 12.8 per cent of total household financial assets. Total SB deposits were
around Rs 8.96 lakh crore as at the end of March 2009. Around 85 per cent of SB
deposits are held by household sector which include senior citizens, small savers,
pensioners, salaried class, small businessman, and others.

REASONS FOR DEREGULATING INTEREST RATE


The deregulation of SB deposit interest rates is part of the process of financial sector
reforms and bank autonomy initiated by RBI in 1992.RBI wants to make SB deposits
more attractive to savers. Deregulation will stimulate banks to offer more SB
products and better product innovations. RBI expects that the SB interest rate
deregulation will improve the effectiveness of monetary policy transmission. In view
of the above, RBI had deregulated interest rates on SB deposits with immediate
effect when it announced the second quarter review of monetary policy on 25
October 2011.

K.C.COLLEGE

DEREGULATION OF INT. RATE

12

CONDITIONS OF RBI ON DEREGULATION OF INTEREST RATE IN


SAVINGS DEPOSIT
RBI has imposed two conditions on the banks while allowing freedom to set their
own interest rates on SB deposits. They are:

First, each bank will have to offer a uniform interest rate within this limit.

Second, for savings bank deposits over Rs one lakh, a bank may provide
differential rates of interest, if it so chooses. However, there should not be any
discrimination from customer to customer on interest rates for similar amount
of deposit.

BENEFITS OF THE DEREGULATION


Banks were in need of more funds (deficit liquidity). So, they increased their SB
interest rates to attract more customers and funds. This was clearly a benefit to
savers. With increased rates, banks attracted new customers. Many SB customers
used the account for their day-to-day transactions. Some wealthy customers keep
high balances and higher SB rates allowed them to earn more interest on their SB
balances. If the difference between interest rate on term deposits and SB interest
rate is wide, savers will shift their money from SB to term deposits. However, if the
difference is small, they may keep their money in SB accounts without bothering
about term deposit rates. Before deregulation, term deposits carried interest rates of
8 to 10 per cent, which was stimulating depositors to keep more money in term
deposits rather than in SB accounts. The benefit to existing customers who are
having sweep facility may not be large. Sweep facility in SB accounts allows the
customers to move excess money beyond a certain limit to fixed deposits; and to
move the fixed deposit amount back to SB account when a customer issues a
cheque or needs funds. The flipside of deregulation is that when banks are not in
need of funds (surplus liquidity), they may decrease the interest rates on deposits
both term deposits and SB deposits. In such situations, interest rate differential
between term deposits and SB deposits may come down lessening the
attractiveness of SB deposits as happened during the 2002-2005 period.

K.C.COLLEGE

DEREGULATION OF INT. RATE

13

DEREGULATION IMPACT ON BANKS


Cost of SB deposits has already gone up for banks before the SB deposit interest
rate deregulation. From April 1, 2010, banks have been giving interest rates on SB
account based on daily product. With effect from 3 May 2011, banks have been
paying four per cent interest rate on SB deposits compared to 3.5 per cent earlier.
The cost of SB deposits will further go up from thereon with the advent
of competition from SB interest rate deregulation. Different banks will get impacted
differently depending on several factors like, branch location, nearness of branch,
facilities provided under SB accounts, technology platform, and alternative delivery
channels. It remains to be seen whether banks will pass on the higher cost of funds
to customers. Depending on the competition, banks may increase their transaction
and service charges for SB customers. However, there are limitations to passing on
the higher costs as any adverse reaction from depositors will cause reputation risk to
banks. Banks which are enjoying higher net interest margins (NIMs) may absorb the
higher cost from hike in SB deposits themselves for the time being.
The SB interest rate deregulation and the consequent increase in cost of deposits
will impact banks differently depending on the number of branches, branch location
and quality of service. Quality of service, branch location, branch network and
product design play a major role in customers choices. For example, Yes Bank is
having around 200 branches. The bank may be able to attract new SB customers to
its fold in locations where it is having branches. However, it cannot pose any threat
to banks in other locations unless it expands its branch network to those locations.

Increased costs and decreased profitability:


Savings account deposits form a large part of a banks liability. Any increased
interest expense on it would bring in additional cost pressures on the bank
thereby affecting their profitability. And as mentioned above, such cost
pressures could be passed on to borrowers and customers.

Less takers for short term fixed deposits:


With a higher interest rate on savings accounts, short term fixed deposits may
no longer attract depositors. The savings account would not only offer a high
rate of interest, but it would also provide high liquidity.

Increased competition:
In the competitive world of retail banking, every bank uses aggressive
mechanisms to retain and attract customers. The deregulation move could
make savings account interest rate as a decisive factor for customers to opt
for a particular bank. Banks would have to offer customers more value for
their money, as part of their marketing effort.

K.C.COLLEGE

DEREGULATION OF INT. RATE

14

Asset and liability of banks:


A banks core deposits come from its savings accounts (liability). These
funds are used by banks to cater to various kind of long term loans (asset).
With banks increasing their interest rates, other smaller banks dependent on
savings accounts, may lose out their vital core deposits to the one offering a
much higher interest rate thereby creating a mismatch between their assets
(loans to borrowers) and their liabilities.

CRITICISM OF THE SB DEREGULATION


The deregulation of SB deposit interest rate has attracted criticism from several
quarters. Some critics questioned the timing of the deregulation. Banks which enjoy
higher share of SB deposits are not comfortable with the deregulation. There are
several rates in the system, which are not deregulated distorting the interest rate
environment in the economy. The interest rates on public provident fund (PPF),
provident fund, national savings certificates (NSC) and post office deposits continue
to be administered by the Government of India. These rates do not move inline with
the market interest rates. As such, there is a need to have a relook at all the
administered interest rates in the country and make them market-determined as
have been suggested by various committees in the past.
Deposits in saving account constitute a huge 13% of the overall savings in financial
assets for individuals. Further it also constitutes 22% of the total deposits of
scheduled commercial banks. Thus any change in interest rate on saving deposits
has a major impact both on the bank as well as on the depositor.

K.C.COLLEGE

DEREGULATION OF INT. RATE

15

Deregulation does not reduces loyalty towards a bank


Saving deposit accounts are not easily transferable i.e. in case the person is not
happy with a particular bank due to its low interest rate offering, he cannot transfer
his account to another bank immediately. Though technically one can freely and
easily open and close a savings account, however, in real life, it is difficult to do so,
since the savings account is linked with other financial products. the person give his
savings account number to the employer for direct credit of salary, the persons
savings account is linked with the mutual fund investments and demat account, his
home loan and car loan EMI is debited to the savings account, he may have given
his savings account number to income tax department for refund and the list goes
on.
Thus, savings bank account is closely linked with ones financial products and
change in savings bank account will not be an easy decision. Thus, before a person
leap for a bank that gives him a carrot of high interest rates on his savings account,
one should check for the sustainability of higher interest rates and also check for the
charges bank will be levying.

K.C.COLLEGE

DEREGULATION OF INT. RATE

16

EXPECTED RESULTS OF THE DEREGULATION


Higher returns on short-term, liquid deposits:
A direct impact of the deregulation of savings bank rates will be on short-term
deposits. Usually, banks offer savings account interest rates on short-term and ultra
short-term deposits. A rise in the interest rates on savings bank deposits means the
interest rates on these short-term deposits will go up too, especially on the higher
amount deposits. A rise in the interest rates on short-term deposits will push up the
yields from liquid deposits and investments.
However, in percentage terms, the interest rates are not expected to go up very
significantly. Therefore, it will not be a meaningful gain for small and individual
investors. Yet, a small hike in the interest rates will result in more gains for high net
worth individuals (HNIs) and the corporate sector due to their larger deposits and
investments.
Higher cost for banks:
The deregulation of savings bank deposit interest rates is expected to put additional
cost pressures on banks and thereby impact their profitability. Analysts believe
banks are likely to offset the impact of this increase in interest costs partially by
levying transaction and service charges on bank accounts.
Also, banks may pass on some of this additional cost to their loan products. Analysts
believe banks will raise interest rates across the board after the recent hike in the
repo rate by the Reserve Bank of India (RBI).
Debt instruments attractive:
Debt instruments are looking more attractive in the current market conditions as their
yields have gone up due to the interest rate hardening. On the other hand, volatility
in the stock markets and changing outlook of the corporate sector have tilted the risk
and returns equation towards risk for equity based investments.
Therefore, it is recommended that individual investors (especially with a short to
medium-term horizon) should review the various aspects of their investments such
as objective, horizon, risk appetite etc, and make the required changes in their
portfolios to ensure balance between risk and returns.
Rising cost for borrowers:
The interest rates on various loan products are bound to go up after the recent rate
hike by the RBI. Some banks have already announced they will be increasing
their loan rates shortly. The rate hike will not pinch much in case of small quantum
and short duration borrowers as they can manage the higher interest rates by
increasing the loan tenure, and keep their monthly EMIs unchanged.
On the other hand, a higher interest rate is bad for borrowers with large loans as
they are bound to pay more in terms of increased EMIs. It is recommended that
borrowers remain regular in their EMI payments.

K.C.COLLEGE

DEREGULATION OF INT. RATE

17

THE GUIDELINES
Though the Reserve Bank of India has given banks a free hand to decide the interest
rate, certain guidelines have to be adhered to by all banks.
1. A uniform interest rate is to be maintained on all savings account deposits up
to Rs. 1 lakh, irrespective of the amount in the account. This means that all
deposits from Re 1 to Rs 1 lakh must be paid the same interest rate.
2. For all deposits over Rs. 1 Lakh, a differential rate may be offered, provided
there is no discrimination in the interest paid between one deposit and
another of similar amount, accepted on the same date, at any of its branches.
3. Deregulation is applicable only to the interest rates on savings accounts of
Resident Indians. Interest rate on Non-Resident Accounts will continue to be
regulated.

K.C.COLLEGE

DEREGULATION OF INT. RATE

18

ADVANTAGES OF DEREGULATION
1) Enhance attractiveness of savings deposits: Regulation of interest rates imparts
rigidity of instrument/product and as interest rates are not changed in response to
changing market conditions the product loses it sheen. This has primarily affected
the saving bank deposits. So deregulating the interest rates would help in enhancing
the attractiveness of this product. Empirical evidence suggests that widening of
interest rate differential between term deposits and savings deposits leads to
reduction in the share of savings bank deposits in total deposits.
This trend is also clearly discernible in respect of population groups (rural, semi
urban, urban) other than metropolitan areas, where savings deposits are not
responsive to the interest rate differential. This perhaps suggests that savings
deposits in metropolitan areas are held less for savings purposes and more for
transaction purposes and hence, are less responsive to interest rate changes.
Deregulation of the interest rate on savings deposit will make the rate flexible along
with other interest rates depending on the market conditions. Since savings bank
deposits in rural, semi-urban areas and urban areas are held largely for savings
purposes, deregulation of interest rate is likely to enhance its attractiveness in these
areas.
Will Improve Transmission of Monetary Policy
Regulation of savings deposits interest rate has not only reduced its relative
attractiveness but has also adversely affected the transmission of monetary policy.
For transmission of monetary policy to be effective, it is necessary that all rates
move in tandem with the policy rates. This process, however, is impeded if the
interest rate in any segment is regulated. Savings deposit constitutes a sizeable
portion (about 22 per cent) of total deposits. The fact that the savings deposit interest
rate has not been changed since March 1, 2003, prima facie implied that changes in
policy rates did not transmit to savings bank deposits. However, before arriving at a
firm conclusion in this regard, it is necessary to consider two possibilities here. One,
even though the savings deposit interest rate is fixed, what matters for banks is the
overall cost of deposits and not cost of any particular component. And if the overall
cost of deposits moves in tandem with the policy rates, then monetary transmission
is not adversely affected. The other possibility, however, is that banks independently
decide interest rates on freely determined components, disregarding the cost of
savings deposits, in which case the overall cost of deposits does not move in sync
with changes in the policy rates, thereby affecting the monetary transmission. This is
a behavioral issue and it is difficult to find a precise answer to this question. The
correlation coefficients of savings deposit interest rate with both the call money rate
(the operating target) and the lending rate of scheduled commercial banks were
much lower than those of term deposits. This suggests that regulation of the interest
rate on savings deposits has impeded the monetary transmission and that
deregulation of interest rate will help improve the transmission of monetary policy.
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19

This is also corroborated by the Hong Kong experience as indicated in Section IV


wherein following the deregulation of savings deposit rate, the correlation between
retail bank deposit rates and market interest rates improved and their spread also
narrowed significantly.
2) May lead to product innovations: Saving Bank deposits constitute 22% of total
deposits. Since there is regulation in this space, there is hardly any scope
for innovations. Both the banks and customers are mere spectators. So deregulating
would result in more innovations in terms of products in this space.
To create competition and encourage banks to introduce innovative products, it is,
therefore, necessary to deregulate savings deposit interest rate. Product innovations
may include a variety of modes of operations such as branches, web-based
channels, ATMs etc. Rates offered may also differ based on the flexibility of
operation of savings bank account and the degree of liquidity offered such as notice
period for withdrawal, number of deposits and/or withdrawals allowed per month and
percentage of amount that can be withdrawn in any given month, among others. It
may be noted here that in response to the deregulation of savings deposit interest
rate in Hong Kong in 2001, a number of banks launched new products such as
combined savings and checking accounts and HIBOR linked savings products.
Some also revised fees and charges and minimum balance requirements, and
introduced tiered structures of interest rates.
3) Will increase the share of savings account in total deposit: The savings rate was
fixed at 3.50% from March 2003 to May 2011, during the period RBI changed Repo
and Reverse Repo rates many times but the same was not reflected in the interest
rates that the normal household gets. There was huge gap between savings and
term deposit rates and hence the ratio of savings deposit in total deposit fluctuated
mainly in rural areas. The deregulation would make such accounts more attractive in
rural areas where savings account is primarily used for savings purpose and not
transaction purpose.

4) RBI policies would become more effective: As savings account constitute around
22% of the total bank deposit, it provides a source of low cost fund to the banks.
Even when the Repo rate was hovering around 8.25%, the savings rate was fixed at
4% before deregulation. Thus the monetary policy review did not have any impact on
this particular source of fund for the banks. After deregulation it is expected that
savings rate would move in tandem with the RBI monetary policy thus making the
policy more effective.

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20

5) Competition among banks: Most banks would like to maximize their CASA ratio as
it provides funds at low cost. Before deregulation there was hardly any competition in
this segment and banks especially public sector banks hardly did any innovation in
this segment. But after deregulation, it is expected banks would try to lure customers
by offering higher interest rates along with other innovations/flexibility to get as many
accounts as possible.
6) It raises the level of competition between banks which directly benefits the
customers.
7) Maximum return for your money.
8) High interest rates on short term deposits (less than 6 months).
9) Switching banks offers better options.

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21

The advantage of deregulation based on CRISIL


CRISIL believes that the Reserve Bank of Indias (RBIs) deregulation of savings
deposit interest rate will benefit depositors by providing them with wider banking
options and by increasing interest income by around Rs. 90 billion. Nevertheless,
this move will intensify competition among banks. CRISIL expects the average
interest rate on savings accounts in the banking system to increase by 50 to 100
basis points (bps; 100 bps equals 1 percentage points) from 4% over the medium
term. However, this means increased pressure on banks cost of deposits and
profitability.
RBIs deregulation of savings bank rates is a step further towards its stated objective
of enhancing benefits for depositors. In April 2010, RBI instructed banks to compute
interest on savings bank deposits on a daily-average basis (Please refer to CRISIL
release Higher effective interest on savings to benefit customers dated April 5,
2010). In May 2011, the interest rate on savings bank deposits was increased to 4.0
percent.
The deregulation in savings deposit rates will result in increased competition among
banks. Small and medium-sized banks, which are trying to increase their retail
deposits base, are likely to be the first movers in increasing the interest rates.
Competition will increase markedly for the larger-ticket savings deposits (Rs.0.1
million and above), especially in the urban and metropolitan areas, which constitute
around 60 per cent of the banking systems savings deposits. This will also induce
banks to offer innovative savings products to different customer segments.
The rise in savings deposits rate will increase pressures on banks profitability. The
banks return on assets ratio is expected to drop by an additional 5 bps because of
this development. (Please refer to CRISILs release High interest rates to impact
banks asset quality dated September 22, 2011).
However, the banks are likely to partially offset the impact of the increase in interest
cost by levying transaction and servicing charges. The banks with established retail
franchise, strong market position in semi urban and rural areas, and robust
technology platforms, are likely to be in a better position to manage the impact of the
deregulation.

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DISADVANTAGES OF DEREGULATION
1) Unhealthy competition: Saving bank deposits form a major chunk of CASA
deposits for banks. So the lure of attracting more saving bank deposits would result
in banks acting irrationally. If not handled properly this would result in unhealthy
competition among the banks in the long term.
A major attraction of savings deposits for banks is that it offers a low cost source of
funds. This is evident from the fact that bank groups with higher share of CASA
(current account and savings account) deposits (of which savings deposit is a major
component) enjoy relatively low cost of deposits. However, the distribution of CASA
deposits among banks is not uniform.
It has also been observed that 49 banks, which have below average CASA deposits,
constitute about 50 per cent of total asset of the banking sector. Therefore, given the
attractiveness of savings deposits, it could be argued that deregulation may lead to
unhealthy competition amongst banks. Should it really happen, it will have
implications in that it will push up the cost of funds of the banking sector. This, if
passed on to the borrower, will raise the cost of borrowings and if not, it will affect the
interest margins and profitability of the banking sector.
2) Risk of asset liability mismatch: Saving bank deposits are basically short term
savings and are withdrawable on demand. In case of deregulation it could result in
asset liability mismatch for the banks. The end result would be ultimately bank credit
for customers would be difficult to come by.
One of the issues often raised by banks in the context of deregulation of savings
bank interest rate is that in the event of such deregulation, it would result in an assetliability mismatch. This is because, although savings bank deposits represent shortterm savings and withdrawable on demand, a large part of savings deposits is
treated as core deposits, which together with term deposits have been used by
banks to increase their exposure to long-term loans, including infrastructure loans.
This is reflected in the increase in the share of term loans in total loans, barring
foreign banks, during the period between 2001 and 2009.
Significantly, during the same period (2001-2009), the share of long-term deposits
(more than 3 years) in total term deposits declined almost steadily.
In a scenario when savings deposits are used to finance long-term assets,
deregulation of savings bank interest rate, it is argued, would have implications for
asset liability management of banks. Any unhealthy competition, arising out of
deregulation may have the potential to create asset liability mismatches as some
banks with large dependence on savings deposits for financing long-term assets
may lose savings deposits to some other banks.

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3) Could affect small savers/ pensioners: There are people who depend on interest
rate as a source of income. Currently they are receiving a fixed rate on saving
bank deposits but in the future after deregulation if there is excess liquidity in the
system the interest rate would fall to a level much below than the current rate
adversely affecting this group.
Primarily the deregulation is being pushed for by the smaller/newer banks as
compared to older/bigger banks. These small banks have small percentage of CASA
deposits and in the current scenario attracting saving bank deposits is not easy. The
reason being since the savers don't find any difference to shift to newer banks, they
would still continue to their existing bank than shifting to a newer one. With this
deregulation they could innovate in this space and attract a higher percentage of
saving bank deposits.
Internationally many countries especially developed ones and those having
high inflation rates have deregulated interest rates and the experiences have been
fairly satisfactory. So buoyed by this data there have been a section of people in our
country who are pushing for the same.
4) Could impact small households: When interest rates are deregulated, it could be
on the downside as well. Banks would not be in a position to compensate savers
properly if there is enough liquidity in the system. This would impact small savers
and pensioners who depend only on savings rate interest for their livelihood.

5) Impact on liquid funds: Liquid Funds are mutual funds that primarily invest in debt
securities and offer higher post tax returns as compared to savings deposit. They
normally invest in Commercial Papers (CPs), Certificate of Deposit (CDs) and
Treasury Bills of maturities less than 91 days. Their mandate is to optimize returns
with preserving capital. But with deregulation of interest rates in savings account
some investors might move towards savings account as it offers higher liquidity and
safety to principal amount. The overall corpus might be impacted by reduced
difference between yields of savings account and Liquid Funds.
However, Liquid Funds yields better return considering tax rate into account.
Moreover it also provides dividend option where only dividend distribution tax (DDT)
is deducted by fund houses before the same is distributed. With deregulation, this
category of mutual fund will definitely offer more innovation as Reliance AMC is
already offering Any Time Money Card in collaboration with HDFC Bank.
Thus a normal investor must spread its savings across Liquid Funds and savings
account to get the benefit of both as Liquid fund is an alternate investment avenue
for individuals to park their short term surplus funds. While savings deposits are
easier to access and offer some degree of principal protection, the higher yield
combined with the liquidity and taxation benefits make liquid funds an attractive
option.

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6) May Lead to Financial Exclusion: Should unhealthy competition result in increase


in interest rate and the overall cost of funds, banks might be discouraged from
maintaining savings deposits with small amounts due to the associated high
transaction costs. This could particularly be the case with public sector banks, which
have a large number of savings accounts and which allows depositors to maintain
very low balances. Thus, it is likely that banks either increase the minimum balance
to be maintained or reduce the number of transactions permitted free of cost and
increase the customer service charges too. This will discourage small savers,
especially in rural and semi- urban areas from opening savings deposits accounts.
The campaign for No Frills Accounts could also suffer a setback. In sum,
deregulation of savings bank deposit rate might have adverse implications for the
process of financial inclusion.
7) Possibility of Introduction of Complex and not so Easily Understood Savings
Products: Although deregulation of savings deposit interest rate may lead to product
innovation, which, in general, will benefit savers, it is also possible that banks
introduce some complex products, which may not be so easily understood by savers.
These strategies may result in increase in the mis-selling of savings bank products,
which will also result.

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25

NON RESIDENT INDIANS


Non Resident Indians (NRIs) must consider investing in NRE / NRO rupee term
deposits. Almost all big banks in India increased the interest rate from a minimum of
3 per cent to a maximum of 9.75 per cent for various maturity bands. Its a no brainer
when one compares these rates 0.2-3.2% in most developed countries, for instance.
In the last one year Indian Banking system has seen a major crunch in liquidity and
acute shortage of funds for Indias infrastructure spends demand. In order to
encourage remittance RBI decided to deregulate the NRE deposits rates so that
funds flow into India to meet the requirements of the country.
Another reason was fall in the value of the rupee in the foreign exchange market.
This was encouraging Indians working abroad to send more money home. This
could only be retained in India if a higher interest rate was given.
RBIs decision to deregulate the savings bank deposit interest rate is subject to two
conditions:
1. Firstly, each bank will have to offer a uniform interest rate on savings bank
deposits up to 1 lakh, irrespective of the amount in the account of the holder within
this limit.
2. And second, for savings bank deposits over 1 lakh, the bank may provide
differential rates of interest if it chooses to.
Besides NRE and NRO accounts, NRIs have a third option in foreign currency nonresident (FCNR) accounts, which allow them to invest their foreign currency earnings
with Indian banks. FCNR accounts used to offer interest rates that are 200 basis
points over the London Interbank Offered Rate or Libor which tends to be very low.
But the RBI deregulation will likely make FCNR less attractive as NRI customers
would prefer higher yielding NRE and NRO accounts. RBI does not allow NRE and
NRO interest rates to be higher than domestic deposit rates, and also links their
movement to domestic rates.

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The appreciation of the US dollar vis--vis the Indian rupee is providing NRIs with
several opportunities to get more rupees against each unit of their foreign currency
remittance to India.
Banks in India are playing a vital role in channelizing remittances and offering
lucrative options for investment of these funds in India, based on the risk appetite
and return expectations of the NRI customers. Popular option is to invest in low risk
and medium return Term Deposits. These can be rupee deposits like NRE FD and
NRO FD or foreign currency non-resident (FCNR) deposit. Attractive exchange rates
combined with deregulation of interest rates and options such as quarterly & monthly
compounding on non-resident deposits, is dually benefiting NRIs. Further, banks are
also offering the facility to book forward contract on the FCNR deposits for a
maximum of 1 year in order to the increase the overall returns on these deposits.
Various Direct Investment opportunities available with NRI customers include
investment under Automatic Route with repatriation benefits, investment with
Government approval, investments up to 100% equity without repatriation benefits
and other investments with/without repatriation benefits.
NRIs can invest in shares or convertible debentures of listed companies on a
recognized Stock Exchange in India under the Portfolio Investment Scheme
(PIS).Combined with the PIS account, the banks offer value added benefits like an
Online Investment Account for NRI customers to facilitate trading in
shares/debentures of Indian companies, automatic reporting of share trade
transactions and calculation & payment of capital gain tax. NRI investors also have
the option of investment in Domestic Mutual Fund schemes offered by recognized
fund houses in India.
NRIs can leverage opportunities in the booming real estate market in India through
acquisition of immovable property and benefit from the appreciating prices & rental
income in India. To facilitate these property purchases, the banks in India are
offering easy Home loans at competitive interest rates.
The current market dynamics and India's promising growth, the pace of which is
much higher as compared to many developed countries, provide NRIs with
opportunities for both mid-term and long term investments. Fluctuations in returns
are expected within a short term horizon, considering slowdown in the global market
and adversely affected European economies. However, in the long run, India's
growth is expected to be more consistent, being a consumption based economy and
on account of demographic advantage with over 50% of the population in the
working age group of 15-64 years.

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27

As a Non Resident Indian one can open:

NRE Savings / Current Account.


NRE Fixed Deposits in Indian Rupees (NRE Time Deposit).
Fixed Deposits in Foreign Currency [FCNR (B)] in USD, GBP, EUR, CAD and AUD.
NRO (Non Resident Ordinary) Account for crediting your income in India, sales
proceeds of immovable property), inward remittance.
A resident may be authorised to operate your account through a Power of Attorney /
Letter of Authority to operate account.
Nomination Facility is available. Nominee can be a resident India or a non-resident.
Payment and Repatriation of balance to non-resident nominee account will be as per
extant RBI/Bank Rule.
How to open Account:
Complete the account opening form along with:

Passport Copy and Resident Visa - copies of these documents duly attested by
Banker/ Notary Public/ India Embassy/ Employer to the satisfaction of the Bank.
Your signature on application form may be verified by anyone of the following:

Indian Embassy / Consulate.


Any person known the Bank.
Notary public.
During your temporary visit to India, you may open account even by tendering
foreign currency notes / foreign currency travelers cheques by personal visit to
Branch. Currency Declaration Form (CDF) will have to be produced if foreign
currency notes is exceeding USD 5000 or its equivalent and combination of foreign
currency notes and travelers cheque exceeding USD 10,000 or its equivalent.

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FEATURES OF NRI ACCOUNTS


Who can open
Currency of account
Type of A/c
Term of Deposit
Whether Joint A/c is
Permitted
Sources of credits in
account

NRE
NRI or Person of Indian
Origin
Indian Rupee
Savings, Current, Time
One Year to Three Years

NRO
NRI or Person of Indian
Origin
Indian Rupee
Savings, Current, Time
On par with domestic time
deposit.
Yes, provided joint
Yes, joint holder may be a
account holders is also an resident or a non-resident.
NRI.
Inward remittance from
Inward remittance from
abroad through normal
abroad through normal
banking channel.
banking channel.
Transfer from another
Transfer from another
NRE/FCNR Account held NRE / FCNR Account held
with other branch / Bank. with other branch / Bank.
Personal cheques, drafts
in foreign currency.

Personal cheques, drafts


in foreign currency.

Travelers cheques in own Travelers cheques and


name and foreign currency foreign currency notes
notes tendered in person tendered in person while
while on a temporary visit on a temporary visit to
to India.
India. And Local Income Rent, interest, pension,
dividend, sale proceeds of
assets held in India
including Immovable
property.
Whether repatriable
Yes.
Current earnings from
Principal and interest,
local sources like interest,
balance in the account is rent, pension, sale
fully repatriable.
proceeds of assets
including immovable
property, net of tax is
repatriable upto USD 1.00
Million per financial year.
Pre-mature closure of time Allowed subject to 1%
Allowed, subject to
deposit
penal interest. No interest conditions applicable to
payable if deposit is closed domestic deposits.
before minimum period of
one year.
Is interest on deposit
No.
Yes, interest on deposit is
taxable
taxed at source.
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29

INTEREST RATE DEREGULATION ON NRE AND NRO DEPOSITS


Prior to 1990s, in line with the regulation of domestic deposit rates, interest rates on
various NRI deposit schemes were regulated. As a first step towards flexibility, the
detailed maturity-wise prescriptions were rationalized in 1992 for NRE deposits, in
line with the flexibility provided for domestic deposits. With a view to aligning the
maturity structure of NRE and domestic deposits, interest rates on NRE term
deposits of maturity over 2 years were freed effective April 4, 1996 while those for
maturity over 1 year were freed effective April 16, 1997. Effective September 13,
1997, banks were given complete freedom to decide interest rates across all
maturities.
With a view to providing greater flexibility to banks in mobilising non-resident
deposits and also in view of the prevailing market conditions, it was decided to
deregulate interest rates on Non-Resident (External) Rupee (NRE) Deposits and
Ordinary Non-Resident (NRO) Accounts (the interest rates on term deposits under
Ordinary Non-Resident (NRO) Accounts are already deregulated). Accordingly,
banks are free to determine their interest rates on both savings deposits and term
deposits of maturity of one year and above under Non-Resident (External) Rupee
(NRE) Deposit accounts and savings deposits under Ordinary Non-Resident (NRO)
Accounts with effect from December 16, 2011. However, interest rates offered by
banks on NRE and NRO deposits cannot be higher than those offered by them on
comparable domestic rupee deposits.
Commercial banks should not pay interest on deposits of money accepted or
renewed by them in Domestic, Ordinary Non-Resident (NRO) and Non-Resident
(External) Accounts (NRE).

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Minimum tenor and rates of interest payable on Savings Deposits and


on Term Deposits:Minimum tenor:(i) Domestic/ NRO term deposits:
The minimum tenor of domestic/ NRO term deposits is seven days. Prior to
November 1, 2004, banks were permitted to accept term deposits of Rupees fifteen
lakh and above, for a minimum maturity period of seven days and, in case of term
deposits of less than Rupees fifteen lakh, the minimum maturity period was fifteen
days. With effect from November 1, 2004, the minimum tenor of domestic/NRO term
deposits below Rupees fifteen lakh has been reduced from fifteen days to seven
days.
(ii) NRE deposits:
With effect from April 29, 2003, the minimum maturity period for NRE deposits has
been raised from six months to one year, making the range of the maturity period for
fresh NRE term deposits from one to three years, in line with FCNR(B) deposits.
However, banks are allowed to accept NRE deposits above three years from their
Asset-Liability point of view, provided the rate of interest on such long term deposits
is not higher than that applicable to three year deposits.

Payment of interest:Banks should pay interest on savings deposits and term deposits, including NRE
deposits.
In view of the satisfactory level of computerization in commercial bank branches,
scheduled commercial banks were advised to calculate interest on savings bank
accounts on a daily product basis with effect from April 1, 2010.
A bank must obtain prior approval of its Board/Asset Liability Management
Committee (if powers are delegated by the Board) for fixing interest rates on
deposits.
Such interest should be paid at quarterly or longer rests. Interest on savings bank
accounts should be credited on regular basis whether the account is operative or
not.

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31

NON-RESIDENT (EXTERNAL) (NRE) ACCOUNTS


After the savings deposit interest rates were deregulated and interest rates of small
savings linked to market rates, now the deposit rates for NRIs have also
been deregulated by the RBI.
The deregulation applies to interest rates on Non-Resident (External) Rupee (NRE)
Deposits and Ordinary Non-Resident (NRO) Accounts (the interest rates on term
deposits under Ordinary Non-Resident (NRO) Accounts are already deregulated).
Accordingly, banks are free to determine their interest rates on both savings deposits
and term deposits of maturity of one year and above under Non-Resident (External)
Rupee (NRE) Deposit accounts and savings deposits under Ordinary Non-Resident
(NRO) Accounts with immediate effect.
However, RBI has stipulated that interest rates offered by banks on NRE and NRO
deposits cannot be higher than those offered by them on comparable domestic
rupee deposits.
The RBI has also stipulated that at any point of time, individual banks should offer
uniform rates at all their branches.
The revised deposit rates will apply only to fresh deposits and on renewal of
maturing deposits.
The Non-Resident (External) Rupee Account NR(E)RA scheme, also known as the
NRE scheme, was introduced in 1970. Any NRI can open an NRE account with
funds remitted to India through a bank abroad. This is a repatriable account and
transfer from another NRE account or FCNR (B) account is also permitted. An NRE
rupee account may be opened as current, savings or term deposit. Local payments
can be freely made from NRE accounts. Since this account is maintained in Rupees,
the depositor is exposed to exchange risk. NRIs have the option to credit the current
income to their Non-Resident (External) Rupee accounts, provided the authorised
dealer is satisfied that the credit represents current income of the non-resident
account holders and income-tax thereon has been deducted / provided for.
RBI deregulated NRE deposits on 16 December 2011 allowing banks to offer higher
interest rates to dollar denominated accounts. Reserve bank freed the rates on NRE
Accounts, offering interest as high as 9.6%.

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32

NRE SB DEPOSIT ACCOUNT DEREGULATED


The Reserve Bank of India (RBI) has with an immediate effect deregulated interest
rates of Non Residential Rupee (NRE) Deposits and Ordinary Non-Resident (NRO)
Accounts. Earlier, interest rates on Non-Resident (External) Accounts Scheme and
Ordinary Non-Resident Deposit under savings account were regulated by the RBI at
4% per annum. The revised deposit rates, however, will apply only to fresh deposits
and on renewal of maturing deposits. Also, interest rates offered by banks on NRE
and NRO deposits cannot be higher than those offered by them on comparable
domestic rupee deposits.
Federal Bank dominance over NRE accounts: Federal Bank, due to its strong
presence in Kerala receives a significant share of the country s remittances. Around
6-8% of remittances to India are routed through Federal Bank, which results in a
large NRE deposit base. NRE deposits make up 15% of the banks total deposits.
These are low cost deposits and are typically priced at LIBOR plus 175bp if
maintained in foreign currency and at LIBOR plus 275bp if maintained in Indian
rupees. As a result, Federal Banks total low cost deposit base (NRE plus CASA) is
at 40%, which is in line with the CASA base of new private banks.
Management interaction: Since, the deregulated interest rates would only apply on
the fresh deposits; the management of Federal Bank regards the impact to be
negligible. Total NRE deposits as of 30 September 2011 stood at Rs6,622cr
(Savings NRE - Rs4,017cr, Fixed NRE - Rs1,072cr & FCNR - Rs1,533cr). However,
the management expects the savings NRE deposits which is at 4% to get transferred
to their fixed NRE accounts, which has now been revised to 6.5% from 3.6% earlier
by the bank post the deregulation. Reliance Securities anticipates some pressures
on the margin front going forward. Also, the management was cautious on the credit
growth since the domestic as well as the global economy has been jittery.

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Following the deregulation of interest rates on non-resident (external) rupee (NRE)


deposits by the Reserve Bank of India, many banks have queued up to increase the
interest rates on NRE and NRO (ordinary non-resident) deposits. Some of the banks
have gone on to increase the rates by three-fold.
This has, predictably, forced the Reserve Bank to advice banks to exercise caution.
In a circular, the apex bank has made it clear that the interest rates offered by banks
on NRE and NRO deposits cannot be higher than those offered by them on
comparable domestic rupee deposits. It has further said that a prior approval of the
board/ asset liability management committee may be obtained by banks while fixing
interest rates on such deposits. At any point of time, individual banks should offer
uniform rate at all their branches, the circular has said. The revised deposit rates will
apply only to fresh deposits and on renewal of maturing deposits. Further, banks
should closely monitor their external liability arising out of such deregulation and
ensure asset-liability compatibility from systemic risk point of view,'' the circular has
said.

Co-operative banks
The RBI has also directed that state co-operative banks and district central cooperative banks (DCCBs) are free to determine their interest rates on NRE and NRO
deposits of one year and above with immediate effect.
Many banks have come out with attractive offers in the past few days. These include
State Bank of India (SBI), ICICI Bank, Kotak Mahindra Bank and Indian Bank. The
aim is to boost foreign currency inflows amid a depreciating rupee.
SBI raised the interest rates on fixed deposits by NRIs of less than Rs. 1 crore with a
maturity of one to two years to 9.25 per cent from 3.82 per cent earlier.
Kotak Mahindra Bank has also hiked interest rates on deposits of one to two years to
9.25 per cent. The latest to join the rate hike bandwagon is ICICI Bank, which raised
the rates by up to 9.25 per cent. Indian Bank has fixed rates on NRE term deposits.
at 9.50 per cent for one year and above up to three years for deposits of less than
Rs.15 lakh, and at 9.25 per cent for Rs.15 lakh and above and up to Rs.5 crores.

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34

Interest rates applicable to deposits held in Non-Resident (External) Accounts


(i) Savings
Account

With effect from December 16, 2011, the interest rates are
deregulated. However, interest rates offered by banks on NRE
deposits cannot be higher than those offered by them on
comparable domestic rupee deposits.
Since interest rate of domestic savings deposits was
deregulated w.e.f October 25, 2011, the interest rate on NRE
savings deposits for the period October 25 to December 15,
2011 was as prescribed in the circular 2010-11 at 4% per
annum.
From the close of business in India on November 17, 2005 to
October 24, 2011, the interest rates on NRE savings deposits
should be the same as applicable to domestic savings
deposits instead of the LIBOR/SWAP rate for six months
maturity on US dollar deposits.

(ii) Term
Deposits

With effect from the close of business in India on December


16, 2011, interest rates on Non-Resident (External) Rupee
(NRE) Deposits are deregulated. Accordingly, banks are free
to determine their interest rates on both term deposits of
maturity of one year and above under Non-Resident (External)
Rupee (NRE) Deposit accounts.
From the close of business in India on November 23 to
December 15, 2011, interest rates on NRE deposits for one to
three years should not exceed the LIBOR/SWAP rates plus
275 basis points, as on the last working day of the previous
month, for US dollar of corresponding maturities (as against
LIBOR / SWAP rates plus 175 basis points effective from close
of business on November 15, 2008).
From the close of business in India on November 15, 2008 to
November 22, 2011, interest rates on NRE deposits for one to
three years should not exceed the LIBOR/SWAP rates plus
175 basis points, as on the last working day of the previous
month, for US dollar of corresponding maturities (as against
LIBOR / SWAP rates plus 100 basis points effective from close
of business on October 15, 2008).

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35

FEATURES OF NRE ACCOUNT

Permitted Debits

Local disbursements.
Remittances outside India.
Transfer to NRE/FCNR accounts of the account holder or any other person
eligible to maintain such account.
Investment in shares/securities/commercial paper of an Indian company or for
purchase of immovable property in India within prescribed regulations.
Any other transaction if covered under general or special permission granted
by the Reserve Bank.

To the account holder:

For personal purposes or for carrying on business activities (except


agricultural/plantation activities/investment in real estate business).

For making direct investment in India on non-repatriation basis.

For acquisition of flat/house in India for his own residential use.


In January 2007, the RBI imposed a restriction on loans against deposits and
securities for NRIs to a maximum of upto Rs. 20 lakh.

To third party:

The loan should be utilised for personal purposes or for carrying on business
activities (other than agricultural/plantation activities/real estate business).
The loan should not be utilized for re-lending.

Loans outside India: Authorized dealers may allow their overseas


branches/correspondents to grant fund based and/or non-fund based facilities
to Non Resident depositors against the security of funds held in the NRE
accounts and also agree to remittance of funds from India if necessary, for
liquidation of debts.

Change of Resident Status of Account Holder: NRE Accounts should be re


designated as resident account or the funds held in these accounts may be
transferred to the Resident Foreign Currency (RFC) Accounts (if the account
holder is eligible for maintaining RFC Account) at the option of the account
holder immediately upon the return of the account holder to India (except
where the account holder is on a short visit to India).

Repatriation of funds to Non Resident Nominee can be permitted by the


authorized dealer or bank in the case of an account holder who is deceased.

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36

Other Features

Joint Accounts: in the names of two or more Non Resident individuals may be
opened provided all the account holders are persons of Indian nationality or
origin. When one of the joint holder become residents, the authorized dealer
may either delete his name or allow the account to continue as NRE account
or re-designate the account as resident account at the option of the account
holders. Opening of these accounts by a Non Resident jointly with a resident
is not permissible.

An Account may be opened in the name of eligible NRI during his temporary
visit to India.

Operation by Power of Attorney: Resident Power of Attorney holder can


operate on the NRE accounts but only for local payments to be made on
behalf of the account holder. The Power of Attorney (POA) holder cannot
credit proceeds of foreign currency notes/bank notes and travelers cheques to
the NRE accounts.

In cases where the account holder or a bank designated by him has been granted
permission by Reserve Bank to make investments in India, the POA holder is
permitted to operate the account to facilitate such investments. POA holders cannot,
however, make gifts from NRE accounts.

Special Series of Cheques

Temporary Overdrawing - permitted from NRE Savings Bank account up to


Rs. 50,000 for a period not exceeding two weeks.
Remittances abroad by Resident nominee - application for meeting the
liabilities if any of the deceased account holder or similar other purposes,
should be forwarded to RBI for consideration.
Tax Exemption - Interest income exempted from income tax, balances held
are also exempt from wealth tax.
Reporting - Transactions to be reported to the Reserve Bank of India.

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37

ADVANTAGES OF NRE ACCOUNT


NRE account has its advantages but it is very much important to know the
regulations of FEMA first. Some advantages of NRE accounts are:

Non Resident Indians can invest in saving schemes and deposit schemes
of Indian banks through this account.
Loans can be availed from both foreign and Indian banks and the
permissible limit for purpose is quite broad as compared to loans provided
to other accounts.
The balances in these accounts can be transferred to other NRE/FCNR
accounts of the same holder or even to NRE/FCNR accounts of other
NRIs.
Transfer of funds across borders with no cost of transfer
Facilities like payment of bills, cheque books, international credit cards etc
are available in these accounts.

DISADVANTAGES OF NRE ACCOUNT


The major disadvantage is that the account is maintained in Indian currency and
while there are ways to remit or transact in foreign currency; there is a loss to
depositors due to the fluctuations in the exchange rates of foreign currency.

NRE ACCOUNT PROVIDERS

HDFC
HSBC
ICICI
SBI
Axis bank

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38

The deregulation of interest rates on Non-Resident (External) Rupee (NRE) Term


Deposits by Reserve Bank of India as announced on 16-12-2011, the following
banks had hiked their interest rates on Non-Resident (External) Rupee (NRE) Term
Deposits in December, 2011.

Sr. No. Name of the Tenor/Period


Bank

Rate of Interest
Existing

Revised

(01-12-11)

after
deregulation

Axis Bank

1 Year & above to < 2 Years

3.82

6.50

2 Years & above to < 3 Years

3.51

6.50

3 Years & up to 10 Years

3.64

6.50

3.82

6.50

Above 1 Year to < 2 Years

3.82

3.82

2 Years to < 3 Years

3.51

3.51

3 Years & above

3.64

3.64

1 Year to 2 Years

3.82

9.00

Above 2 Years to 3 Years

3.51

8.50

Above 3 Years to 5 Years

3.64

8.25

1 Year & above but < 2 Years

3.82

6.50

2 Years & above but < 3 Years

3.51

6.50

1 Year to < 2 Years

3.82

9.00

2 Years to < 3 Years

3.51

9.00

3 Years & above

3.64

8.75

Federal bank 1 Year only

HDFC Bank

ICICI Bank

Yes Bank

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39

ORDINARY NON RESIDENT (NRO) ACCOUNTS


NRIs can open Non-Resident Ordinary (NRO) deposit accounts for collecting their
funds from local bonafide transactions. NRO accounts being Rupee accounts, the
exchange rate risk on such deposits is borne by the depositors themselves. When a
resident becomes an NRI, his existing Rupee accounts are designated as NRO.
Such accounts also serve the requirements of foreign nationals resident in India. AD
Category-I banks may permit foreign nationals who have come to India on
employment and are eligible to open/hold a resident savings bank account to redesignate their resident account maintained in India as NRO account on leaving the
country after their employment to enable them to receive their legitimate dues
subject to certain conditions.
NRO accounts can be maintained as current, saving, recurring or term deposits.
While the principal of NRO deposits is non-repatriable, current income and interest
earning is repatriable. Further NRI/PIO may remit an amount, not exceeding USD
one million per financial year, out of the balances held in NRO accounts/ sale
proceeds of assets /the assets in India acquired by him by way of inheritance/legacy,
on production of documentary evidence in support of acquisition, inheritance or
legacy of assets by the remitter, and an undertaking by the remitter and certificate by
a Chartered Accountant in the formats prescribed by the Central Board of Direct
Taxes vide their Circular No. 10/2002 dated October 9, 2002.
A NRO (Non-Resident Ordinary) account is a rupee denominated account. Foreign
currency which you wish to deposit is converted to Indian rupees at the time of
money is deposited into the account. NRO account is for NRIs who are having
income (like rent, dividend, and pension) in India and to make local payments in
Indian Rupees for their genuine needs in India.

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40

FEATURES OF NRO ACCOUNT

Funds in a NRE account will be maintained in Indian Rupees.


Source of funds into NRO accounts can only contain funds received from
within India.
NRIs can open this account jointly with an Indian resident or with another
NRI.
Funds can be transferred from an NRO account to an NRO / Resident
account.
Funds cannot be transferred from an NRO account to an NRE account
Interest in NRO account is taxable.
Repatriability is subject to conditions (That is, converting funds to any
foreign currency).
Power of attorney holder can operate the account ( that is, Power of
attorney can make local, rupee payments on behalf of the NRI ).
NRO account is converted into a regular resident account if NRI returns to
India permanently.

ADVANTAGES OF NRO ACCOUNT

Interest earned on these accounts is high as Banks can themselves


determine interest rates.
These accounts also offer joint account facility with a resident or a NRI
individual.
Nomination facility is available with both NRI and resident Individuals.

Transfer from NRO to NRE account allowed.

Save cost, convert your taxable return into TAX FREE return, Limit for
transfer from NRO to NRE but NO Limit for conversion out of NRE.

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41

DISAVANTAGES OF NRO ACCOUNT

Funds deposited in these accounts are not fully repatriable. Interest amount is
repatriable only on payment of taxes and Principal amount is repatriable upto
US $ 1 million per financial year. Thus the funds available in such an account
can be utilized only for making local payments.
The interest earned on these account is taxable in the hands of NRI.

DIFFERENTIATING NRE AND NRO ACCOUNT


1) Taxability: The interest income earned for NRO accounts is taxable as per the tax
slab of an individual whereas interest income for NRE accounts is completely tax
free. Recently RBI deregulated interest rates for NRE accounts, thus making sense
for NRI Indians to invest in NRE accounts and getting tax free income.
2) Withdrawal and Deposits: For an NRE account, deposits can be made only in
foreign currency and withdrawals are permissible in Indian rupees. However
repatriation outside India is also allowed in any form. In case of NRO accounts,
deposits can be made in rupees and foreign currency both but withdrawals are
permissible only in Indian rupees.
3) Transfers: The funds can be transferred from NRE to NRO accounts but transfer
of funds from NRO to NRE accounts is not permissible.
4) Other facilities: As highlighted above features like joint account opening and
nomination is available for both accounts with the difference that in case of NRE
accounts, these facilities can be availed only with an NRI and not with resident
Indian. But in case of NRO accounts joint account opening and nomination can be
done with a resident Indian.

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42

ADVANTAGE OF DEREGULATION
While inflows in Non-resident (External) Rupee accounts (NRE) have increased
on the back of higher interest rates, the funds in foreign currency non resident
(FCNR) and Non-Resident Ordinary Rupee (NRO) accounts have been falling
because of the interest rate differential.
The Reserve Bank of India (RBI) has deregulated NRE deposits and banks can
now offer interest rates on NRE deposits on par with domestic deposits of same
maturity. Interest rates on NRE accounts have increased by 500-600bps since the
announcement made on December 16, 2011. Interest rates on FCNR dollar
deposits that are still regulated are around 2-2.5 per cent, while banks are taking
NRE deposits at 9-10 per cent.
In aggregate, there has been a dip in the foreign currency and NRO accounts.
Some premature withdrawal pressure on FCNR accounts could not be ruled out.
Bankers have suggested to the central bank that deregulation be allowed in
foreign currency accounts, too. However, the central bank is not believed to be
convinced with the idea, as higher accretion in FCNR deposits would only
increase forex liability of Indian banks.
While funds can be transferred from foreign currency accounts into NRE accounts,
the same cannot be followed for NRO accounts. In case of NRO accounts, fresh
flows have been diverted. There has been a shift in remittance flows from NRO to
NRE accounts after the interest rates on the latter were increased. The bank has
raised rates twice since deregulation.
These Flows are largely from the US, Europe and the Gulf. However, high net
worth NRIs are largely from the US and Europe.
If this continues, it may put redemption pressure on banks as people would
withdraw prematurely from FCNR accounts to take advantage of higher interest
rates in NRE accounts. Converting the existing NRE/FCNR deposits will lead to
loss of interest for period of investment. If the loss on account of premature
closure is compensated on the new deposits, there will be pressure on premature
closure.

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43

DISADVANTAGE OF DEREGULATION

The biggest fall back is the exchange rate risk. Rupee as a currency has
shown it weakness in Nov-December 11 periods. Expert say it will take time
before it goes into stable range. The rupee depreciation will be beneficial
when you are getting funds in India as you will get more rupee per unit the
foreign currency and vice versa. The recent volatility as Depositor has to face
this during the time he is invested.

Although the returns on FCNR and NRE are tax free in India but they are
taxable as per the structure of the country where NRI lives. This can be as
high as 55% for some countries and this will bring the actual returns lower.
For this please consult the tax advisor before investing in India.

The rules and caps over investments in foreign currency keep on changing on
frequent basis. These rules are covered in various acts like RBI Regulations,
FEMA and different banking regulation acts and guidelines. NRI needs to be
proactive and informed in this matter.

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44

INTERNATIONAL EXPERIENCES
This section provides a summary of the experience on deregulation of savings bank
deposit accounts in select developed and emerging market countries.
Interest rates on savings account in developed countries such as Canada, Japan,
Australia, New Zealand, UK, and USA are all deregulated and determined by the
commercial banks themselves on the basis of market interest rates. Most savings
bank accounts may carry customer charges if the number of transactions exceeds
the permissible level.
Many countries in Asia experimented with interest rate deregulation to support
overall development and growth policies. Interest rates were fully deregulated in
Singapore in the mid-1970s and in the Philippines, Indonesia and Sri Lanka in the
early 1980s. Malaysia, Thailand and the Republic of Korea engaged in a gradual
deregulation process, characterised by more frequent adjustments and the removal
of some ceilings.
Although several countries deregulated interest rates on savings bank deposits long
ago, Hong Kong did so recently and may particularly be relevant for India. Interest
rates on bank deposits in Hong Kong, which were regulated by a set of interest rate
rules (IRRs) issued by the Hong Kong Association of Banks (HKAB), were
deregulated in phases by July 2001. This involved the removal of the interest rate
cap on savings accounts and the prohibition of the payment of interest on current
accounts. In response to the deregulation, a number of banks launched new
products such as combined savings and checking accounts and Hong Kong interbank offered rate (HIBOR) linked savings products. Some also revised fees and
charges and minimum balance requirements, and introduced tiered structures of
interest rates.
Based on an examination of the effects of interest rate regulation and subsequent
deregulation on the efficacy of monetary policy and rigidity of retail bank deposit
rates in Hong Kong, Chong (2010) found that interest rate deregulation had
increased the efficacy of monetary policy by improving the correlation between retail
bank deposit rates and market interest rates and increasing the degree of long-term
pass-through for retail bank deposit rates. He also showed that the adjustments in
retail bank deposit rates were asymmetric and rigid upwards during the regulated
period, but tended to be rigid downwards during the deregulated period. The spreads
between retail bank deposit rates and market rates also narrowed sharply after the
removal of interest rate controls.
Rates on savings accounts in China are regulated by the Peoples Bank of China,
which specifies ceiling interest rates on these accounts. Currently, the cap is at 0.5
per cent per annum. The account provides easy access to deposited funds. Interest
rates are calculated on a daily product basis. The savings account comes with a
choice of either a passbook savings or a statement savings account. There is no
charge for the transactions carried out in the savings account and the minimum
balance in these accounts is very low at RMB 1.

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45

Following deregulation in Taiwan, a fee is charged for each transaction. DBS Bank,
Singapore provides a facility that combines the current account and savings account,
but has a higher minimum balance to be maintained and the customer is charged if
the minimum balance is less than stipulated. The account also carries monthly
charges for operating the account.
In countries in which financial sector reforms also included interest rate deregulation,
the action was primarily taken because real rates were negative, and was being
propelled by inflationary pressures. The most immediate result of financial
deregulation in these select Asian economies was the enhancement and
maintenance of positive real interest rates, which, in turn, contributed to an increase
in financial savings. It also forced a diminution in the financial market segmentation
exemplified by smaller dispersion of interest rates. The deregulatory process on the
interest rate structure combined with the central banks credible monetary policy
measures for anchoring inflation expectations led to positive real rates of interest at
least temporarily for Asian countries, viz., Indonesia, Malaysia and the Philippines,
although only the first two countries sustained a positive real interest rate structure.
On the whole, cross-country experience shows that in most countries, interest rates
on savings bank accounts have been deregulated and are now fixed by commercial
banks based on the market interest rates. Banks generally offer variable interest
rates on savings deposits. Savings bank deposits have similar characteristics such
as simple procedures with no limit on the length of the maturity. Further, there is a
low or no minimum amount for opening of the savings accounts and banks generally
charge fees for various services offered to the depositors.

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CONCLUSION
The process of deregulation, which began in the early 1990s, was largely completed
by 1997. A few categories of interest rates that continued to be regulated were small
loans up to 2 lakh and rupee export credit on the lending side, and savings deposit
interest rate on the deposit side. The small loans up to ` 2 lakh and rupee export
credit were deregulated in July 2010 when the Reserve Bank replaced the
benchmark prime lending rate (BPLR) system with the Base Rate system. The only
interest rate that continued to be regulated was the savings deposit interest rate.
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.
Regulation of savings deposit interest rate had imparted rigidity as savings deposit
interest rate had not been changed since March 1, 2003 although other interest rates
have moved in either direction. Interest rate paid on savings deposits was lower
than those on term deposits of all maturities, other than for term deposits at very
short end for a brief period.
The empirical evidence suggests that unlike metropolitan areas, savings deposits in
rural, semi-urban and urban areas were responsive to interest rate changes in
savings deposits. Therefore, market-based interest rate had been beneficial to
savers. Since savings deposit is a hybrid product which combines the features of
both current account and term deposit, a market based rate of interest on this
product has the potential to attract large savings from low income households.
Deregulation allowed banks to introduce product innovations which could also
benefit the depositors. Deregulation has another major advantage in that it will help
improve the monetary transmission.
However, some concerns have also been raised with regard to deregulation of
savings deposits interest rate. Savings deposits have been a source of cheap funds
for banks. This is reflected in the low cost of deposits in respect of those banks
which hold relatively high proportion of CASA deposits (a major portion of which is
savings deposits). In addition, banks treat a large portion of savings deposits as
core deposits, which has been used to finance long-term assets. However,
distribution of savings deposits is skewed among banks with some banks enjoying
relatively high share of savings deposits than others. It has also been observed that
a large number of banks (accounting for about half of the size of the banking sector)
hold CASA deposits lower than the average CASA deposits. In view of this pattern,
banks have often raised the concern that deregulation may lead to an unhealthy
competition. This, in turn, it will result in large shift of deposits from some banks
exposing them to a serious risk of asset-liability mismatch.

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47

However, analysis of interest rates on term deposits after they were deregulated did
not result in any unhealthy competition amongst banks. Although spreads (the
difference between the term deposits interest rate over the relevant policy rate)
tended to widen somewhat in a deregulated environment in comparison with when
interest rates were regulated, this was not unusual as similar or somewhat higher
spreads were observed in recent years. Thus, if deregulation of term deposits did not
lead to any unhealthy competition, deregulation of savings deposit rate also not
result in any unhealthy competition.
The experience with deregulation of term deposits interest rate also suggests that
deregulation resulted only in a marginal shift of deposits from public sector banks
and foreign banks to private sector banks. Thus, if deregulation of term deposits
interest rate is any guide, deregulation of savings deposit interest rate may not result
in an unhealthy competition and a large shift of deposits from one bank to another,
thereby destabilizing the system. Further, the Reserve Bank has deregulated the
entire asset side and bulk of liability side of banks balance sheets. In such a
scenario, continuing regulation of savings deposit interest rate leads to distortions in
the system, which needs to be avoided.
Concerns have also been expressed with regard to the interests of low income
households in a deregulated environment. There is a risk that in a deregulated
environment when the cost of maintaining such deposits becomes high, banks may
introduce such features as may prevent small depositors from accessing such
accounts. While attractive returns may encourage low income households to open
such accounts, it may also reduce accessibility of such accounts for small savers if
banks impose some restrictions on the operation of such accounts. However, such
issues are better addressed by regulatory prescriptions rather than by regulation of
interest rates.
In sum, deregulation of savings deposit interest rates has both pros and cons.
Savings deposit interest rate cannot be regulated for all times to come when all other
interest rates have already been deregulated as it creates distortions in the system.
International experience suggests that in most of the countries, interest rates on
savings bank accounts are set by the commercial banks based on market interest
rates. Most countries in Asia experimented with interest rate deregulation to support
overall development and growth policies. These resulted in positive real interest
rates, which in turn contributed to an increase in financial savings. Deregulation of
savings bank deposit interest rate also led to product innovations.

K.C.COLLEGE

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BIBLIOGRAPHY

http://www.investmentyogi.com/spending/the-impact-of-savings-accountderegulation.aspx#
http://www.dnaindia.com/money/report_decoding-savings-rate-deregulation-andhow-it-impacts-liquid-funds_1606196
http://www.scribd.com/doc/70909913/Why-Are-SB-Interest-Rates-DeregulatedVRK100-30Oct2011
http://www.mbaskool.com/business-articles/finance/241-savings-bank-accountinterest-rate-pros-cons.html
http://tips.thinkrupee.com/articles/non-resident-external-nre-rupee-account.php
http://rbidocs.rbi.org.in/rdocs/Content/PDFs/DPS270411F.pdf
http://www.ninemilliondollars.com/2012/09/basic-difference-between-nre-and-nroaccount/
http://www.centralbankofindia.co.in/site/MainSite.aspx?status=2&menu_id=91
The times of India

K.C.COLLEGE

48

DEREGULATION OF INT. RATE

49

ACKNOWLEDGEMENT

I would like to thank Mr. Kailash Chandak for giving me such an


interesting topic. I would also like to thank Sir for providing guidance
to me during my work in the project.

K.C.COLLEGE