LOCAL bankers fear the Consumer Council's recommendation to abolish the Interest Rate Agreement would lead to more service charges, instability in the financial market and riskier lending by banks. The Hong Kong Association of Banks, the protector of the Interest Rate Agreement, disagreed strongly with the council's main finding, which accused the agreement of helping the sector to extract an average of $6 billion in cash gains from depositors every year. The association will scrutinise the report, which was released yesterday, and organise its counter-arguments. ''There are fundamental flaws in the report, especially the methodology in calculating the [cash gains],'' said Philip Martin, secretary of the association. He was sceptical of the argument that service charges would not be increased if the agreement were abolished. ''There is no reason why charges will not go up. Look at the United States and UK markets when they were deregulated,'' he said. Sir William Purves, chairman of HSBC Holdings, the parent company of Hongkong Bank, said it was a misconception that banks in Hong Kong had much higher interest margins than their counterparts in Europe and the US. ''I personally think that small customers get first class service in Hong Kong,'' he said. The chairman of Hongkong Bank, John Gray, said abolishing the Interest Rate Agreement would lead to banks re-assessing the cost structure of their products because a lot of the existing accounts were unprofitable and being subsidised. ''Banks would try to ensure that the cost will be fully covered,'' he said. Hang Seng Bank managing director Alexander Au said banks would no longer have cross-subsidisation of accounts and would resort to levying service charges. The smaller players in the market had a different concern. They were afraid of being squeezed out by the stronger local and foreign banks who can afford to put up higher interest rates for deposits. ''Small banks cannot compete with the bigger ones. Deposits will then gravitate towards the bigger players,'' said John Aspden, chairman of the Association of Restricted Licence Banks and Deposit-Taking Companies. Due to the unique feature of Hong Kong's banking sector, which was dominated by a few big banks, the competition which would follow the lifting of the agreement would put small banks at a disadvantage. ''They would be very tempted to be involved in risky lending in order to support the higher interest rate offer,'' he said. He saw no reasons why Hong Kong should step into unknown territory, risking the stability of the system at a time when the territory needed a strong banking system to finance future infrastructure projects. Another local banker said banks were already competing aggressively for swap deposits by lowering the maximum amount, offering consumers alternatives to get around the agreement. In contrast, the Consumer Council's other recommendation on greater disclosures by banks was welcomed by the association. It conceded that banks should follow the international trend to enhance financial disclosure, but expressed reservation about the timetable proposed by the council. The banking sector initiated a voluntary effort to press forward with increasing transparency by setting up a working party in January. The working party, chaired by the Hong Kong Monetary Authority and attended by representatives from various banks, has agreed that more financial disclosure is desirable and the industry should take a big leap forward in this direction. But the group has yet to decide how far and how fast the disclosure process should go. Monthly meetings will be held and recommendations will be made to the banking sector by the middle of the year.