| India is set to usher in another set of banking reforms | | | | Chakrabarty said in an interview. |
| in a few months with the Reserve Bank of India (RBI), | | | | Currently, Indian banks offer a fixed interest rate of 3.5 |
| the central bank, proposing to deregulate savings rates. | | | | per cent on savings deposits. The RBI has mandated |
| This comes after a major overhaul of the way banks | | | | that this rate be calculated on a daily basis effective |
| fix their lending rates. The RBI is going to enforce a | | | | April 1, 2010. |
| new discipline among banks, requiring them to | | | | Bankers say deregulating savings rate will help |
| announce their own base rates, which will work like | | | | consumer get a better deal. As the banking space |
| benchmarks for all lending products. | | | | gets competitive with the arrival of a large number of |
| The so-called base rates will replace the existing | | | | private banks and consolidation among public sector |
| benchmark prime lending rate. Indian banks have this | | | | players, banks are looking to raise their levels in |
| so-called benchmark in practice but more often than | | | | savings and current accounts, a source of cheaper |
| not they lend, especially to big corporates, at rates far | | | | liquidity. |
| below this rate. | | | | And when they get to offer savings rates at their own |
| The new regulation, which comes into force from July | | | | discretion, many are expected to use them to draw |
| 1 this year, is expected to bring in the much-needed | | | | new customers. But these rates may also fluctuate |
| transparency and competition among banks in pricing | | | | wildly depending on the availability of liquidity. Also it |
| their products. This is also likely to tie down banks from | | | | remains to be seen if the new base rate and the |
| offering teaser rate loans, a practice that has become | | | | proposed deregulation of savings rates will tighten |
| rampant in the mortgage loan segment ever since a | | | | margins so much as to hurt profitability and viability of |
| bubble burst in India's real estate sector and the | | | | smaller banks. |
| slowdown in the domestic economy triggered by the | | | | Indian banking sector has undergone a huge |
| global financial turmoil in 2008 and 2009. | | | | transformation even since the industry was opened up |
| Now in the next stage, RBI plans to deregulate savings | | | | for private participation and foreign players as part of |
| rate. At present banks can fix rates only on deposits | | | | the broadbased economic reforms initiated in 1991. The |
| over Rs 2 lakh (approx $5,000). | | | | central bank has since restricted licensing of new |
| "Deregulation of interest rates (including savings rates) | | | | foreign players, but the government this year proposed |
| is an important way forward for reforms. The base | | | | to open licensing of new domestic players. |
| rate system that will come into affect from July 1 is | | | | Last year, the central bank freed use of automated |
| also an important reform method," RBI governor D | | | | teller machines for bank card holders across banking |
| Subbarao said last week. | | | | platforms and ordered banks mandatory |
| "There is now a consensus in the government and RBI | | | | accommodate segments of the unbanked population. |
| that all rates should be deregulated, including the | | | | The government and the central bank are also in the |
| savings bank rate. It is certainly on the anvil. It could | | | | process of implementing a new mechanism of using |
| either be freed completely or there could be a floor | | | | banking correspondents, which will use prominent |
| price fixed as threshold, beyond which banks cannot | | | | citizens and even grocery shops in villages as dealing |
| go. We need to decide on the mode of migrating to | | | | points to take banking to far-flung areas. |
| the new system," RBI deputy governor KC | | | | |