Ideally, in a free market economy, there should be few controls and more checks and balances. Over the years, RBI has been following this approach while putting in place more prudential measures, whether to ensure the balance sheets reflect the true quality of assets or to rein in systemic risks by capping exposures to companies. At the same time, it has made it easier for banks to run their businesses and compete as the environment becomes more challenging. To this end, about five years back, the central bank allowed lenders to decide how much they wanted to pay customers for the savings accounts provided the interest rate didn’t fall below 4%. Today, almost all public sector banks offer 4% on a savings balance while the newer private sector banks—Kotak Mahindra Bank and Yes Bank—offer a higher rate 6 or 7%. That’s not surprising since the newer players are trying to build a customer base whereas since the incumbents already have a strong liability franchise, they don’t need to offer a higher rate.
It is not, therefore, clear why the Competition Commission of India (CCI) believes the state-owned banks are teaming up to hold the savings rate at 4%. The regulator is believed to be investigating this ‘cartelisation’. Banks must be free to set both deposit and lending rates, subject to some checks, which is exactly how RBI has designed the system. Moreover, they must be left to chalk out strategies to grow the business; they cannot be expected to do so if they cannot take key decisions themselves. Most important, banks—whether in the public or private sector—are not obliged to ensure that savers get a good return. Neither is that the responsibility of the government although, unfortunately, it continues to pamper citizens with interest rates that are not just completely out of sync with the benchmarks in the system, they are also pressuring its balance sheet. If savers are unhappy with the returns from deposits they are free to park their savings elsewhere—but rewards are commensurate with risk. The fact that state-owned lenders are unlikely to default, backed as they are by the sovereign, is in itself a big plus for savers. If they prefer returns over safety they should switch to the private sector banks. The truth is public sector banks don’t need to offer more.