Your thoughts on the deregulation of the savings rate...
We need to be clear about why we are deregulating savings rate. Presumably its because we say every other rate is deregulated so this also should be deregulated. In a scarcity situation, every participant in that industry is competing with each other. Its just like if you do an oil price deregulation when the price is at $50-60 a barrel, you would not have a problem. However, at $110 per barrel you will have a problem. You are maintaining tight liquidity at this point in time so if you must deregulate rates, you should first wait for market conditions to normalise.
The RBI has said that deregulation would facilitate price stability and innovation. What do you have to say on that
I dont know what innovation it facilitates. As far as interest rate on savings accounts are considered, overseas nobody is giving 3.5%. Today the rate on a 30-day deposit is 4% with no ATM card, no cheque book, no cash withdrawal at my counter. As a banker I would prefer this as the cost of maintaining a savings account is very high and nobody offers that rate globally. For a savings account to break even at 3.5%, you would need an average balance of Rs 7,000 per month. At 5.5 %, you would need an average balance of Rs12, 000 to break even.
To presume that banks would raise deposit rates if rates are deregulated would be wrong. IBA has been saying there will be a decline. Once you say you have deregulated saving rates, you will have to deregulate charges. Six free transactions on the ATM itself costs the bank Rs 70 and if you multiply that by 12, the cost is higher. Price discovery will hurt financial inclusion which the RBI governor also acknowledged.
Does this mean long-term lending by banks would be affected because these accounts would no longer be sticky
For the system as a whole, saving accounts will remain sticky but that will not be the case for individual banks because money could move from one bank to the other. And since we would not be able to consider this as a stable source of resources, we cannot use it to lend long-term. So to that extent, long-term term funding will be affected. I dont believe there will be any great price discovery or innovation. Some small banks may temporarily get some advantage but for the system it may not be so. We are only 3% of the market. I can temporarily play off the market and win but the bigger share belongs to the others.
What is your view on new banking licences being given by the RBI
India is an under-banked country. We need more banks because there is a demand and supply mismatch. If anybody thinks these new participants will alter the landscape in a hurry, it will not happen. As for industrial houses being permitted, both models exist in the world professionally managed as also those owned by large industrial groups. Which model is right for us is up to the regulator to decide.
What do you make of the Malegam Committees recommendations on MFIs
MFIs are very important for financial inclusion and simply because of the excesses of a few, you should not throw the baby out with the bathwater. I agree with most of the recommendations of the committee which include a cap on the lending rate at 24% and the requirement that the bulk of the lending should be done for productive purposes so that there is repayment capacity.
MFIs need to be adequately capitalised so that they can take any shocks and these institutions also need to be regulated in an appropriate manner so that there is transparency as they are dealing with the poorest of the poor. Perhaps the limit on income of Rs 50,000 is excluding a lot of people. MFIs had moved to microcredit, they would need to move to microfinance, which is to lend to self-help groups.