Freeing of interest Rates

Freeing of interest rates.
This refers to your edit Set it free-Let go off Savings bank Interest rate ( ET ,June 19). The Reserve Bank's recognition of the need to deregulate the interest rate on savings bank deposits is appreciable and needs to be viewed as a very progressive step and part of next instalment of banking sector sector reforms. This will help to bring in constructive competition among public sector banks and between public sector and private sector banks. More than anything else, this step alone will bring in improved customer service in public sector banks as retention of deposits is based not only on interest payment but also on the efficiency of service. Customer stands to benefit a lot from this deregulation as and when made effective. Small depositors and pensioners can expect to have a better return from this change.

For banks, this is an opportunity to achieve better operational efficiency and improved customer service. Their cost of deposit on savings bank deposits will however, increase a bit which has already gone up effective from April1, on introduction of payment of interest on daily balance basis. The SB interest deregulation coupled with the implementation of base rate for their advances from 1st July, the banks will have to fine tune their balance sheet and bring in more dynamism and perfection in their Asset Liability Management to reduce the cost of funds and maintain net interest rate margin,

Dr.T.V.Gopalakrishnan

(an edited version of this appeared in Economic Times Dt 21/06/10)