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C. Shivkumar

Bangalore , Aug. 25

PUBLIC sector banks have opposed the deregulation of the savings bank (SB) deposit rate as demanded by the new private sector banks and foreign banks operating in the country.

High-level public sector bankers said that the reduction in the savings bank rate was not acceptable, as it would completely erode the confidence of retail depositors in the banking system.

Sources said that despite the 50 basis point (0.5 per cent) cut in the repurchase rate last weekend, deposit rates are unlikely to witness any major reductions.

Instead, bankers said that some rationalisation would be made, to bring down the long-term rates.

The bankers said, "The present level of SB rates are already below the rate of inflation. Besides, savers' interests have to be protected."

Presently, the SB rate at 3.5 per cent is the only administered interest rate. So far almost all the new private sector banks and foreign banks have sought the removal of this administered rate in a bid to allow time deposit rates to fall further or allow even short-dated time deposit rates.

Presently this is not possible, since the SB rate acts as the floor.

For public sector bankers, the present SB rate does not pose any major problems because of a large number of account holders that they have.

The weighted average costs of working funds for them are already under 5 per cent.

However, the new private sector banks and foreign banks are at a considerable disadvantage, with the weighted average cost of working funds upwards of 7 per cent.

As a result, public sector banks, the sources said, would be in a better position to bring down the lending rates, and yet protect the spreads despite the falling yield on investments.

For the new private sector banks and foreign banks, the falling yields on investments and lending rates would, on the contrary, imply narrowing of spreads, the sources added.

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