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    Why RBI Governor has chosen this time for deregulating Saving Fund interest rates ?


Rajesh Goyal,  Executive Consultant,


Some analysts have been advocating that RBI Governor Dr. D. Subbarao is too predictable as most of the repo rate increases were in line with the market expectations except once the increase of 50 bps in repo rate in July 2011.  However, the same analysts had considered Dr. Reddy, the former Governor of RBI, as a surprise man, who often added some surprise element in the decisions and timing of the changes in the policy rates etc

A few weeks back  we have written that PSU Bank heads are openly defying Dr Subbarao's guidance.  Inspite of increase of 25 bps in repo rate in middle of September, none of the major PSU banks even thought of increasing its base rate or the interest rate applicable to corporate sector.    (See our article dated 17/09/2011 Even PS Banks Are Openly Defying RBI Signals to Control Inflation - Should RBI Not Intervene).   Now  the same people openly say that RBI's policy has been a failure.

Now questions arises as to what options are left with the RBI Governor in circumstances where he is blamed for failure of policy, but bank CMDs openly defy his signals for readjustment of the interest rates for their asset portfolio.   We believe that Governor needs to be tough and if need arises, he should be using the arm twisting.   However, Dr Subbarao till now appears to be too soft,  at least in the matter of arms twisting.   

The deregulation of the saving bank interest rates have been under discussions for many years now, and had been on the agenda of RBI for at least one year.   However, CMDs of all the major PSU banks had been advocating at various forums against this move.  These banks were the same who had large CASA deposits and were also defying RBI Governor in the matter of policy decisions.   The present time is really a bad phase for the banking industry in India.  With YTM in government securities almost at peak in the recent years, increasing NPA, all round pressure for classification of NPAs based on system driven classification, banks are under tremendous pressure to save their bottom lines.   SBI has already faced the music in last two quarters.

Is this the right time to de-regulate Saving Fund interest rates ?  We believe, that this was not the best time for this move, but has been done in frustration as CMD's of major PSU banks were openly defying RBI Governor.  With single stroke, RBI has taken out the wind out of the arrogant and corporate savvy  bank chiefs.  This is a surprise move by Dr Subbarao and almost everybody was taken by surprise.

Now Bank chiefs are running for cover.  The best part is that in last four to five days, none of the major PSU bank has been able to give a firm view as to whether they will increase the interest rates for saving accounts.  On the other hand, small bank like Yes Bank has already increased the Saving Bank interest rates to 6%.  The statements issued till now by PSU bank chiefs indicates a confusion and shows they had no back up plan for this move.  We have observed that since May 2011, many major PSU banks had been running a big campaign for increasing their base for CASA deposits. 

We would like to remind PSU bank heads that the deposits in Saving Fund deposits will be shifted from PSU banks to small private sector banks at a much greater speed then the term deposits, mainly on account of two reasons - poor customer service at PSU banks and no penalty clause in withdrawal of the funds from saving fund accounts.  There will be lesser loyalty factor in these cases.  Anybody with saving bank accounts with two banks can shift the funds by merely issuing a cheque and without the need to visit even the branch.  With most of the banks having system of centralised clearing system at cities, the Branch Manager will not even know about the same at the time of clearing the cheque.


Bank heads needs to take the clue and fall in line with the policy dictates of RBI.