Debate: Should savings rate be deregulated?

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More often than not when we speak of rising rates, we think of the poor borrower who boots a higher EMI. We don't worry much about poor depositor these days who needs to be rewarded with some inflation beating returns at least for his savings.

CNBC-TV18's special presentation Indianomics, takes a look at life from the point of view of the depositor. The savings rate in this country has remained at 3.5% since 2003-although inflation has always been above that figure. Isn't this an injustice to the depositor? The question we are asking today is-should the savings rate be deregulated?

Savings deposits comprise 24% of all the deposits in the country. About 86% of this held by households-the un-savviest of India's savers. Nearly 95% of these never move and so the banks consider them core deposits. Despite all the advantages they are paid the least-all of 3.5%.

CNBC-TV18's banking editor Latha Venkatesh discusses this issue with veteran banker Shikha Sharma, MD and CEO of Axis Bank; RK Bakshi, executive director of Bank of Baroda and Jayant Varma professor at IIM Ahmedabad, who represents the non-bank expert view.

Below is a verbatim transcript of the interview. Also watch the video.

Q: What is your sense-if the savings rate is deregulated tomorrow chances are the rates will go up?

Sharma: It is tough to say because it depends on the broader interest rate environment and if we look at the whole lending rate borrowing rate, cost structure that banks carry today-3.5% is what banks have build their business model around. So unless something was to change dramatically, banks will not find it easy to increase that rate a whole lot more. In the current environment and in the current business model 3.5% is what banking can support.

Q: What's your sense? I see all the bankers clamoring for these low cost current accounts and savings accounts deposits. Clearly they are hungry for this rate. Do you think that if it is deregulated it will go down? Aren't chances are that it will go up?

Bakshi: I would tend to agree with the argument that it cannot be determined as of now and it will depend a lot on the interest rate scenario. Let me give you an example-till sometime back the term deposit rates-even today they are low-until sometime back the maximum rate was 6.5%, today also say five year term deposit may get you 7.25-7.5%, so it's a 2% or 3% difference. The argument can be that the overall deposit rates in the banking industry do not cover up for inflation as it exists today. But saving bank is an operational account.

Let us segregate the saving part of it from the operational convenience. It has become a much more powerful tool in the hands of the user-the deposit holder today. Long back, when the saving rate was reduced from 5% to 3% or 3.5% in 1995-96, the governor that time had said that saving bank is meant for operational usage and those who want to earn rate of interest they can put it in term deposits.

Today, a number of banks are offering sweep facility from the saving bank account. The overall cost of deposit the bank or the highest term deposit rate if you compare to 3.5%, in some ways over a medium-term the rates can even move down. So this is a protection-when you talk of the un-savviest of the account holders-I think 3.5% provides not a bad floor today for the protection.

Q: What are your thoughts-upfront would you say that a saving rate, mandated rate of 3.5%, is fair or would it be better to put it as a floor rate of 3.5% or whatever and then let the market decide the correct rate? What would be you thoughts?

Varma: We must certainly deregulate that. This is among the few interest rates which are still administered-other than the small savings rate, this is the only one really administered. We have to just deregulate. I also believe that it will not make too much of a difference because if we go back to the mid-eighties experience 15-day term deposit is a very close substitute to a savings bank account for non-operational balances.

We already have the data on that. If you look around at 15-day deposits in many banks it is lower than 3.5%. There are few banks where it may be close to 3.5%. That competition is already there. If somebody was really interest rate hungry they can always move it out into a 15 day deposit. Today, you have the ability to move in and out of term deposit and savings bank accounts. I do not think it will make too much of a difference.

What I think will happen is that will we see proliferation of many different kinds of saving banks accounts. Just as you have many different kinds of credit cards-some in which you pay an annual fee and get a lot of benefits and in some you do not pay a fee and do not get benefits-you will have savings bank accounts which will give you a high interest rate but then do not give you any other benefits. You will have other savings bank accounts, which say that the interest rate is low but will give you unlimited withdrawals at any banks, ATM and you will have a priority loans and all kinds of that stuff. So that is what I would expect that to happen.

At today's scenario, I do not see deregulation of interest rates making too bigger difference. Where it could make a big difference is if we get into high interest rate regime. If we had double-digit interest rate, then yes, deregulating savings bank interest rates or will make a big difference. But even there I would doubt-all that would happen is it would remain 3.5% and you had double digit interest rates then a lot of depositors will move the non-operational balances into 15-day deposit.

I do not see this as a very big thing today. But I think we have embarked on a path of deregulating interest rates. We may just continue with that and let savings bank rate also be fully market determined.

Q: That is exactly what has happened actually in a lot of countries. What you have seen is a very fine differentiation within the saving bank account itself as professor Varma said. There will be accounts offered where you have unlimited transactions and a lower rate or higher rate and limited transactions. Basically the markets drive more innovation maybe even better customer service. So let us assume that it gets deregulated tomorrow-what kind of an upshot would you see in terms of response to that product itself-product differentiation?

Sharma: If we look at the 7 to 15-day deposit rate today rate of interest range anywhere from 2% to 4%. So again to come back and illustrate will interest rate rise as a result of deregulation?-in the current environment probably not but I do think that it will give scope to package products based on different customer needs with difference features and that could be an interesting thing to see in the market.