Though it's early days yet, the Reserve Bank of India [Get Quote] has at least begun to talk of the need to free up savings bank accounts -- tucked away in the credit policy was a line asking the Indian Banks Association, a premier bankers' body, to chalk out a road map for deregulation.

Savings bank accounts, which account for anywhere between a fourth and a fifth of total bank deposits in the country, are the only segment of deposits where interest rates are still regulated -- the interest paid on savings accounts is currently 3.5 per cent.

And contrary to the impression given to crores of customers across the country, savings bank accounts are actually a huge subsidy given by them to public sector banks that today hold nearly 85 per cent of the total funds in savings accounts across the country.

The reason for this is simple. Today, private banks that have low customer deposits tend to borrow heavily in the overnight call money market to cover temporary demand-supply imbalances, at around 5.25 per cent.

So, if the savings bank rate was to be deregulated, they would, in all probability, hike rates to over the current 3.5 per cent, and lure away depositors from public sector banks in much larger numbers.

And since there is equal protection for depositors (the RBI's Deposit Insurance Credit Guarantee Corporation guarantees deposits up to Rs 100,000 each) in public and private banks, the customers would logically move to banks that offer higher interest rates. Once this happens and public sector banks have to offer higher interest rates on savings deposits, their margins will obviously come under pressure.

How high the rates can go will obviously depend upon what banks can do with the money. If, for instance, a bank uses funds from a Rs 10,000 deposit, say, in the call money market or in the RBI's reverse repo window, it can earn around Rs 525 annually. If, on the other hand, it lends to retail investors at around 9 per cent, the earning goes up to Rs 900 -- as against this, the money from the savings account costs it just Rs 350.

Of course, what needs to be factored in here is the additional costs a bank has to incur on savings accounts other than the 3.5 per cent interest rate.

If a customer visits a bank once a month, the costs of this to the bank is estimated to be around Rs 60 in metros. So, that's an annual interest cost of Rs 720 or 7.2 per cent if the bank deposit by the customer is Rs 10,000.

Add to this, the costs of providing three to four cheque books free every year as well as quarterly statements by post. If, on the other hand, the customer uses the ATM, the transaction costs come down to around Rs 10-15 or so, for a reasonably busy ATM. So, if a bank uses an ATM network more aggressively, it can afford to hike savings bank interest rates by perhaps one to two percentage points.

To some extent, private banks have already started finding ways to hike savings bank interest rates. For instance, some of them offer "auto swipe" accounts where money kept in savings bank accounts automatically flow into a term deposit when it crosses a certain level (say Rs 5,000 or so) and earns a higher interest rate.

They also offer facilities like "zero balance" for salary accounts (though a salaried person rarely has a zero balance) and free bank drafts for keeping a certain amount (say, Rs 10,000 or so) in a bank account at any given time, and so on.

Till the Indian Banks Association comes up with a road map for deregulating the savings accounts segment, and the government accepts the report, public sector banks have a window of opportunity, where they too can start offering similar facilities to savings account holders.