Should RBI regulate SB Interest rate?

 Should RBI Regulate SB Interest Rate?

'CASA' is a famous term in banking that denotes Current Accounts and Savings Bank Accounts. It is famous because they are demand deposits, which comes to the banks at nil/lower costs as the customer has the right to withdraw any amount from the bank accounts (in person/cheques as well as via online) without giving any notice. Of course, different banks stipulate average minimum balance to be maintained, below which penalties will be levied. The accounts, known as operating accounts, are special for the banks in the sense that it differentiates a bank from a NBFC, which is only entitled to accept time deposits (payable after due date/compliance of certain conditions, in case of premature closure). CASA share for the banking system as a whole is estimated at 35% of the total deposits. While few banks have a CASA share of less than 30%, majority of public sector banks (PSBs) and major private sector banks have a healthy CASA share of more than 40% (One PSB has a CASA share of 50%). Even in a period of high interest rates for fixed/term deposits, banks are able to keep their average cost of funds at a much lower level due to healthy CASA share.

While no bank can pay any interest on current accounts as it is not permitted by Reserve Bank of India, the banks have the liberty to fix SB interest rate for their customers and the interest rate can also be differentiated, slab wise. The banks also have the liberty to credit the  SB interest accrued on a monthly/quarterly basis. The only stipulation that was brought in by RBI, sometime back, was that the interest shall be paid on the daily outstanding in the account instead of the minimum balance maintained between the 10th day and the last day of a month, as was the practice earlier.

During the pre and onset period of COVID, when the repo rate was slashed by 250 basis points and also due to stipulation that banks should link their retail/MSME lending rates with external bench mark rates (mostly repo rate was linked), banks not only reduced their fixed deposit rates but the SB interest rates well below 3%.  However, things have changed since last year, as repo rate was increased once again from 4% to 6.5%. Along with term deposits, the interest rate in respect of SB account have gone up appreciably in a few banks. Though SB accounts, where the outstanding is less than Rs.1 lac continue to get interest rate of 3-3.5% only, slabs in excess of Rs.1 lac attract interest at above 5%, with higher interest rate going up to 7.50% in certain banks. 

On a perusal of the table of SB interest rates in a majority of the banks, it is observed that higher interest rate is offered by almost all SFBs, the two banks, which got their universal banks licenses in 2016 and a few private banks, which had issues to be sorted out not long before. The reason for such an attractive rate appears to be their eagerness to continue the focused lending in unsecured, credit cards, micro finance, self-help groups/joint liability groups(SHG/JLG), where the yields are in excess of 15%. In respect of a few banks, the higher interest rates are offered for outstanding balances in excess of Rs.5 lacs in order to attract depositors, who normally refrain from keeping balances in individual banks in excess of Rs.5 lacs (so as to insure their accounts fully under DICGC). 

Though the said banks have their ALCO and risk departments to manage the risk arising out of paying higher interest on daily outstanding in deposits and lending the same in loans repayable in 36-60 months period, should not RBI stipulate certain ceilings in respect of the SB interest rates offered. Stipulating overnight call money rate as a ceiling might not be an acceptable logic as borrowings in call money is resorted to meet temporary liquidity mismatches only. In my view, RBI may stipulate that the higher interest rate in SB account should not be in excess of interest rate paid for a fixed deposit of 3/6 months tenure.  

It is only a loud thinking. You may respond.

Regards.

V.Viswanathan

30th November 2023.

Annexure

SB Interest Rates offered by different banks

Name of the Bank	Outstanding slab	SB Interest rate
ESAF SFB	Up to Rs. 1 lac High Interest Slab – above Rs.5 lacs	3.5% 7.5%
Equitas SFB	Up to Rs. 1 lac High Interest Slab – 5 lacs to 50 cr.	3.5% 7.0%
AU SFB	Up to Rs. 1 lac High Interest Slab 10 lacs to 1 cr.	3.5% 7.0%
Fincare SFB	Up to Rs. 1 lac High Interest Slab – 2 lacs to 5 cr.	3.51% 7.11%
Suryoday SFB	Up to Rs. 1 lac High Interest Slab –  5 lacs to 10 cr.	3.0% 7.25%
Ujjivan SFB	Up to Rs. 1 lac High Interest Slab above 5 lacs	3.5% 7.5%
Jana SFB	Upto Rs. 1 lac High Interest Slab – 5 lacs to 10 cr.	3.5% 7.5%
Bandhan Bank	Upto Rs. 1 lac High Interest Slab – 10 lacs to 2 cr.	3.0% 7.0%
IDFC First Bank	Up to Rs. 1 lac High Interest Slab – 5 lacs to 25 cr.	3.0% 7.0%
Yes Bank	Up to Rs. 1 lac High Interest Slab – 10 lacs to 5 cr.	3.5% 7.0%
RBL Bank	Up to Rs. 1 lac High Interest Slab – 25 lacs to 2 cr.	3.5% 7.5%
IndusInd Bank	Up to Rs. 1 lac High Interest Slab – above 10 lacs	4.0% 6.0%