A study on impact of RBI decision to deregulate savings account interest rates on the banking industry.

Transcription

1 Sharada P. Chauhan Entire Research Academy s SPC ERA International Journal of E-Commerce and E-Banking Exact Papers URL : Issue IJECEB A study on impact of RBI decision to deregulate savings account interest rates on the banking industry. N.Saikiran Kumar Asst. Professor Aurora P.G College, Moosarambagh College, Hyderabad,Andhra Pradesh,India saikirankumar.n@gmail.com Abstract-One product that is widely considered to be the safest haven for all types of investors to park their funds is a savings deposit. In India Reserve Bank of India (RBI) fixes the interest earned on these deposits. RBI in its second Quarterly Review in October 2011 deregulated the interest on savings accounts. This research is done to analyze the impact of this decision taken by RBI on the banking industry. Two parameters Net interest Margin (NIM) and Current and Savings account (CASA) deposits are studied. Research for these parameters is done pre and post RBI announcement. The statistical tool used to carry out this research is paired sample T Test. It can be concluded from the research that this decision by RBI is not affecting the banking industry as a whole.the findings of this research can throw light on further directions that are to be taken by RBI Key Words: Savings Account, Interest deregulation, Paired Sample T Tests, Banking JEL Classification codes-e52, E58 Prologue In banking parlance deregulation means the mechanism of removal of regulator control.in India the banking regulator RBI stipulates the rate of interest that should be given to savings bank account holders. The current rate of interest that is to be given by banks as mandated by RBI is 4%. In India a major component of the financial sector reform process was to deregulate deposit and lending interest rates. For years together the system of administering interest rate proved to be inefficient. As part of the financial reforms initiated by the country it became necessary to reform the interest rate structure. The main intention of deregulating interest rates was to promote competition, beef up the transmission of monetary policy. The process of deregulation of interest rates, which began in the early 1990s, was largely completed by October 1997.On the deposit side, the only interest rate that was left to be regulated was the savings deposit interest rate. The Central bank RBI in its second quarter review on October 25 th 2011 decided to deregulate Savings Bank Deposit Interest Rate. By taking this decision RBI has given powers to all Scheduled Commercial banks (SCB) to determine their own interest rate that they can give on savings account. This decision by RBI has been taken after releasing a discussion paper on this subject. In the discussion paper that

2 was released by the Central Bank a public opinion on this subject was asked for. Some of the advantages of this decision can be as follows. 1) May help in new product launches. : Out of the total deposit in the banking industry about 22% of total deposits constitute saving bank deposits. For the general public there was no difference in having their deposits in any bank. Now with interest deregulated they can choose their own bank. This will lead to banks innovate new products to woo the customers. 2) Increase of number of savings deposits for all the banks-with cost of funds increasing for banks and inflation touching uncomfortable levels as seen by RBI there was mismatch in interest rates. This decision to free up will help banks to set up their own level of interest rates which will build their savings deposit base. Some of the disadvantages which can be possible with this decision are listed below. 1) Unhealthy competition: Savings bank deposits form the major portion of the total deposits of the bank. These deposits are acquired at a low cost from the customers. Deregulating interest rate may create unhealthy competition among different banks and they may play many tricks to get hold of savings accounts. 2) Asset liability mismatch risk: Saving bank deposits can be basically classified as short term savings and are withdrawble on demand. When there are multiple withdrawal requests for the same bank because of customers moving to another bank paying higher interest than the situation may result in creating an asset liability mismatch for the bank This move by RBI was buffeted by the fact that for most of the SCB s operating in India, Savings Deposit are about 22%. Deregulation is common practice in all well developed countries like US, Europe, Canada. Backed up by the data and public opinions that this is the correct time for deregulation the RBI has taken this decision. The parameters which are taken into consideration to understand the impact of this decision are NIM and percentage of CASA accounts held by banks This paper analyses the impact of this decision by RBI on Scheduled Commercial Banks. Research questions The following Questions have been identified for the research Purpose 1) Is there any significant difference in Net Interest Margin (NIM) of Banks before and after RBI Announcement? 2) Is there any significant difference in percentage share of CASA deposits of Banks before and after RBI Announcement? Research methodology Nature of the research The present study is descriptive in nature. As the objective of this study is to analyze

3 the impact of RBI Decision to deregularise savings account interest rate on banking industry this study is descriptive in nature Research Design The population considered for this research is all Scheduled Banks in the country. The sample size taken for this research is 8 banks. These 8Banks consisted of both Public Sector and Private Sector Banks. For achieving the objectives of the research two variables Net Interest Margin(NIM) and Current Account And Savings Account (CASA)percentage share out of total Deposits for a Bank are studied. For this research NIM and CASA data is collected for 4 quarters. Data is collected for two quarters before the RBI announcement and two quarters after the RBI announcement. This study is entirely based on secondary data. Data for the research is collected from Websites of the different banks that are part of the sample. Information regarding NIM and CASA percentage is taken from Quarterly and Annual Reports of the banks. To achieve the set objectives Paired sample T Tests is used. Paired Sample T test is a type of Parametric Test.Parametric tests are used when Data used for the research is normal in nature. To establish the fact that the data used for the research is normal in nature normality tests are done. In this research Shapiro-Wilk tests for normality is used for determining the normality of the data. Tools for Analysis The Shapiro-Wilk test is a statistic test which calculates a W statistic that tests whether a random sample, x 1, x 2,..., x n comes from a normal distribution or not. Researchers have interest in knowing how the same sample change over time or in response to some intervention.this objective of testing the sample over different time is achieved by using paired sample T Tests. Paired Sample T Test is a statistical test which is used to compare two sets of measurements which are dependent. It can be done in a case where only one sample that has been tested twice or when there are two samples that have been "paired. Hypothesis Hypothesis for the first objective is stated as below Null: There is no significant difference between the means of the the two variables pre NIM and postnim Alternate: There is a significant difference between the means of the two variables pre NIM and postnim H 0 : μ P1-P2 = 0(Null Hypothesis) H A : μ P1-P2 0(Alternate Hypothesis) Here P1represents population parameter prenim P2 represents population parameter postnim μ P1-P2 is the parameter for the mean of the pair-difference: P1-P2 Hypothesis for the second objective is stated as below Null: There is no significant difference between the means of the the two variables pre CASA and postcasa

4 Alternate: There is a significant difference between the means of the two variables pre CASA and postcasa H 0 : μ P1-P2 = 0(Null Hypothesis) H A : μ P1-P2 0(Alternate Hypothesis) Here P1represents population parameter precasa P2 represents population parameter postcasa μ P1-P2 is the parameter for the mean of the pair-difference: P1-P2 Results and findings Table1: Tests of Normality Tests Normality of Kolmogorov -Smirnov a Shapiro- Wilk Statistic Df Sig. Statistic Df Sig. Prenim * Postnim * Precasa * Postcasa *. This is a lower bound of the true significance. a. Lilliefors Significance Correction Interpretation From the table 1it can be interpreted that since the significance level of Shapiro- Wilk test is greater than 0.05 for all the 4 variables the data is normally distributed

5 As the data is normally distributed paired sample T Tests can be used for the Table2:Paired sample T Tests research Statistics Paired Difference s T Df Sig. (2- tailed) Mean Std. Deviation Std. Mean Error 95% Confide nce Interval of the Differen ce Lower Upper Pair 1 prenim postnim Pair 2 precasa postcasa Interpretation From the table2 it can be interpreted that since the p-value (0.201) for prenim and postnim pair is greater than (α) Value of 0.05 the null hypothesis is accepted. Thus it can be concluded that there is no enough evidence to say that there is difference in NIM for banks before and after the RBI Announcements. From the table2 it can be interpreted that since the p-value (0.065) for precasa and postcasa pair is greater than (α) Value of 0.05 the null hypothesis is accepted Thus it can be concluded that there is no enough evidence to say that there is difference in CASA percentage shares for banks before and after the RBI Announcements. Conclusion Basing on the research that has been carried out it can be concluded that RBI decision to deregularise interest rates is not significantly affecting the Banking industry Future Scope This research is done for only few banks. This study can be extended to all the banks operating in the country.this research was carried out taking data for 4 quarters only. Few more quarters can be included for further research.

6 References ent.aspx?id=2344(accessed on October 10 th 2012) User.aspx?Id=6779&Mode=0(Accessed on October 10 th 2012)