Tuesday, October 25, 2011

De-regulation of savings bank deposit interest rates and more

Reserve Bank of India (RBI) announced its second quarter review of Monetary Policy 2011-12 today.  As expected, the repo rate has been hiked by 25 basis points (100 basis points is one percentage) to 8.5%.  The reverse repo rate stands adjusted to 7.5% (spread of 100 basis points below the repo rate).   RBI has stated in its press release that “…momentum indicators, particularly the de-seasonalised quarter-on-quarter headline and core inflation measures, indicate moderation.  This is consistent with the projection that inflation will decline beginning December 2011”.  Thus there are chances that this may be last in series of rate hikes and RBI may take a pause.

De-regulation of Interest Rates

RBI increased interest rates on savings bank deposit to 4% in May 2011.  To complete the process of deregulation of the rates, banks are now free to determine savings bank deposit interest rates, subject to the following two conditions:
1.    for deposits upto Rs. 1 lakh, uniform interest rates shall be offered by all banks.
2.    for deposits above Rs. 1 lakh,  banks are free to provide differential rates of interest.

The operational guidelines, to be released, shall specify how this shall work.  But banks shall not be allowed to discriminate between customers on interest rates for similar amount of deposit.  Thus each bank shall offer different interest rates, depending on the market conditions and interest rate scenarios, on savings bank deposit above Rs. 1 lakh.

Generally it is not advisable to keep substantial amount in savings account since one gets less interest on it.  However it is a positive move considering that traditionally we love to keep money in bank accounts and any increased in interest rates on such deposit is welcome.

Enhancement of Customer Service and no prepayment penalty

Damodaran Committee had made several recommendations for improving customer service in banks10 action points on which broad consensus have emerged has been decided to be implemented.  

Key points amongst the 10 actions points are:
1.   No pre-payment penalty for floating rate loans.  However fixed rate loans shall continue to have pre-payment penalty.
2.   Issue of TDS certificate and to dispatch it to account holder’s mailing address.
3.   One view of all bank accounts (savings, fixed deposits, loans, etc) with a bank.


Though RBI has increased interest rates, which can lead to increase in rates for home and other loans products, deregulation of savings deposit interest rates, abolition of prepayment penalty on floating rate loans and improvement in customer service are few positives from this monetary review announced a day before Diwali. 

Happy Diwali!!!

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