Scrapping interest rate rules may hit depositors

PUBLISHED : Tuesday, 11 January, 1994, 12:00am
UPDATED : Tuesday, 11 January, 1994, 12:00am

THE Government warned that scrapping the rules on bank interest rates might hurt small depositors and lead to banks taking more risks.

The Financial Services Branch said: ''The Hong Kong banking system is already highly deregulated and competitive. The costs and benefits of further deregulation need to be carefully weighed.'' Interest rates paid to depositors on Hong Kong dollar deposits of up to $500,000 and with a maturity of 15 months or less are governed by the rules of the Hong Kong Association of Banks.

There have been complaints the interest rates paid by banks to depositors are too low and the margin which they earn is too high.

The Consumer Council is looking into the issue and a report is expected soon.

The branch said that, in considering whether the profits of banks were excessive, it must be remembered that they had been operating in a very favourable economic environment over the last three years.

''Banking is a cyclical business and it is not a bad thing for banks to build up their reserves and strength in good years so that they are better equipped to deal with bad years.

It noted that banks' interest rate margins were determined by both the deposit rates and lending rates. And the latter were not subject to the interest rate rules.

''If margins really are abnormally high, there is scope for the excess to be competed away through lower lending rates,'' said the branch.

It added that since it was costly for banks to provide services to retail deposits, the abolition of the interest rate agreement could lead either to the withdrawal of such services or the imposition of charges by banks to cover the costs.

The move could also drive banks to compete more aggressively for deposits and compensate for the narrowing of margins by taking more risks in their lending.

And if the banks were to raise their interest rates significantly, it could undermine the exchange rate stability objective.

''We need to make sure that the laudable drive for more competition is achieved in a cautious and gradual manner and is not done at the expense of undermining the stability of the banking system.''