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Savings bank interest rates fall: how households are affected by loss and lenders gain

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An interesting development in the banking sector that has not provoked much discussion is the lowering of savings bank interest rate by 50 bps by a number of banks. It was spearheaded by SBI; and quite expectedly, other banks have followed. Most banks that were offering 4% interest on these deposits would now pay only 3.5%. Those which were offering 5-6% have also brought down their rates by a similar amount. This action was contrary to the action taken by banks in 2011—even while RBI deregulated interest rate on savings deposits in October 2011, the response of some banks was to increase rather than decrease it. In fact, the rate had gone up to 7% for some banks above a minimum threshold of deposit level. Now, for the first time, banks have lowered the rate. Such an act has several interesting implications.

The first is that when one bank does take such action, others follow. There has always been an oligopolistic approach towards interest rates in the country even after deregulation, as all banks normally end up working in unison as the invisible hand guides them. There could be differences in interest rates offered on different tenures of bank deposits, but such decisions are guided more by their respective requirements of funds to match asset tenures. This holds especially for public sector banks (PSBs), where it may be difficult to distinguish the interest rates offered on deposits.

Second, households appear to be very sticky when dealing with banks. When some private banks offered a rate of 200-300 bps higher on savings deposits, there........

© The Financial Express