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'Savings bank deposit rates, a case of cartelisation' - Outside View by S.S. TARAPORE
'Savings bank deposit rates, a case of cartelisation'

Most banks have frozen the rate at 4%, says former RBI Deputy Governor

With majority of the banks freezing the savings bank deposit rate at 4 per cent despite the central bank deregulating it in 2011, former RBI Deputy Governor SS Tarapore sees this as a clear case of cartelisation, requiring the attention of the Competition Commission of India.

The Reserve Bank of India (RBI), under the stewardship of the then Governor D Subbarao, deregulated the savings bank (SB) deposit rate, giving banks the freedom to determine the interest rate, with effect from October 25, 2011.

However, barring handful of banks such as Kotak Mahindra Bank, IndusInd Bank, YES Bank and Lakshmi Vilas Bank, which are offering higher interest rate on SB deposits, all others have stood pat. "The banks, the big banks, they are like people who have been in jail all their lives and have now been told you are free. Now, an inmate of the jail says, ‘What does freedom mean?' Freedom means you can do what you want," explained Tarapore at a summit organised by BSE last week.

He observed that despite the gates of the jail being open, the person (bank) walks back into the jail and says, "I'm so used to being in jail. So I want to remain here even though I'm totally free... Now that is what the major banks have done today."

Banks' call

Pointing out that banks have the discretion to take a decision to raise or lower the interest rates, the economist said that if they thought it is wrong to raise rates, then why not lower them. But they do neither.

"How do you expect a financial system to develop when the banking system remains frozen? Interest rates go up 2-2.5 percentage points on the policy rate; no change (in interest rates by the banking system). Interest rates come down; still no change.

"What is this if it is not an iron rule set up by cartels? Are we going back to the 1880s when in the US the anti-trust laws had to come in when all the major oil companies fixed the price?" said Tarapore, who was the Deputy Governor from 1992 to 1996. He felt it is nonsense to talk about financial inclusion if banks hit the person who comes to them in the first place by saying they will only pay 4 per cent.

"I know you (bankers) will say the cost of funds is very high. In urban areas my (banks) cost of funds are very low if I open savings bank account, but if I do it in rural areas my cost is very high. Okay, if your cost is very high, why don't you reduce it? No, you (banks) want to run a cartel.

"Those who are running the cartel are anti-financial inclusion. Since the government is committed to financial inclusion, why are we doing this? There must be a wake up call. There must be a public agitation," emphasised the economist.

 Please Note: This article was first published in The Hindu Business Line on June 22, 2015.

This column, Maverick View is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Freepress Journal, is titled Common Voice.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.


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