Post on 12-Jul-2015
transcript
P R E S E N T E D B Y A L O K K U M A R S E C T I O N - C
A deposit account held at a bank or other financial institution that provides principal security and a modest interest rate
Most liquid investments outside of demand accounts and cash
Combination of current account and term deposits.
An interest rate is the cost of borrowing money
The interest a lender receives is his compensation for taking a risk
interest rate is your compensation for temporarily giving up the ability to spend your cash
Interest rate for secured credit and unsecured credit
March 2, 1978 – Interest rate @ 4.5 % p.a.
April 24, 1992 – Interest rate @ 6.0 % p.a.
March 2003 – Interest rate @ 3.5 %
Presently 4 @ p .a.
Interest Rates for Savings Bank Deposit vis-à-vis Select Term Deposits
Note : Data pertain to 5 major public sector banks
It means it will not be under control of RBI anymore. The interest rates will differ for each bank. The banks will decide the interest rates based on their financial condition and other factors. The deregulation puts more competition among the banks to attract more savings bank account holders.
As a part of financial sector reforms, the Reserve Bank has deregulated interest rates on deposits, other than savings bank deposits. The interest rate on savings bank deposits has remained unchanged at 3.5 per cent per annum since March 1, 2003.
Early 1990’s – India pursued financial sector reforms as a part of structural reforms
April 1992 – Single ceiling rate of 13% for all deposits above 46 days
November 1994 – Ceiling rate was brought down to 10%
October 1995 – Banks were allowed to fix interest rates on deposits with maturity of over 2 years
The process of deregulation started in October 1997
Deregulation – prior to this the interest rate was 3% to 4%
As a result of deregulation the interest rates are higher for deposits of more than Rs 1 lakh
October 1997 – Deposits rate were fully deregulated by removing the linkage to Bank rate
April 1998 – RBI gave freedom to commercial banks to fix their own interest
Strengthen the competitive forces
Improve alocative efficiency of resources
Strengthen the transmission of monetary policy
Product innovation
Price discovery
PROSMay Enhance Attractiveness of Savings deposite
Will Improve Transmission of Monetary Policy
May lead to product innovation such as branches, ATM etc
CONS Possibility of an Unhealthy Competition
Risk of Asset Liability Mismatches
May Lead to Financial Exclusion
Could Adversely Affect Small Savers/Pensioners
Possibility of Introduction of Complex and not so Easily Understood Savings Products
DEREGULATION IMPACT ON BANKS
Increased costs and decreased profitability
Less takers for short term fixed deposits
Increased competition
Asset and liability of banks 22
DEREGULATION IMPACT ON DEPOSITERS
Higher earnings from saving accounts
Short term investment option
Increased cost of loans for borrowers
Increased charges
IMPACT ON LIQUID FUNDS
Liquid funds are mutual funds
Some investors might move there funds towards savings account as it offer higher liquidity and safety of the principle amount
liquid funds yield better returns if we take tax rate into account
With deregulation, this category of mutual fund will definitely offer more innovation
Savings deposit interest rate can not be regulated for all times to come when all other interest rates have already been deregulated as it creates distortions in the system
The RBI said that deregulation of interest rates in India since the early 1990s has improved the competitive environment in the financial system, imparted greater efficiency in resource allocation and strengthened the transmission mechanism of monetary policy
Deregulation of interest rates on savings bank account will only prompt customers to move from one bank to another, rather than bringing in new customers into the banking system
Banks wishing to enjoy cheaper (savings bank) funds will, therefore, have to work much harder on non-interest factors like service quality, ease of access and other related services on offer to retain customers and ensure their loyalty
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