BANK DEPOSITORS - A DISCRIMINATED CLASS

BANK DEPOSITORS - A DISCRIMINATED CLASS

PAPER PREPARED BY A.J.JAI SHANKAR.

 

BANK DEPOSITORS –A DISCRIMINATED CLASS.

The banking industry in India has a unique position in the Indian economy. It has contributed over the past several decades for the growth of various sections of the country. The two main constituents of the Banking Industry are its Depositors and Borrowers. Both of them have an important role in the growth of the Banking system in the country.

This paper seeks to study the impact of Inflation on the economy and more particularly on the common people. In order to mitigate the impact of inflation various measures are taken by the Government, The Reserve Bank of India and the banking industry.

In this paper an analysis is made of the inflationary trends over the past several years and the measures taken by the RBI like the changes in REPO rates and their consequent impact on the Deposit and lending rates of the Banks.

The main purpose of this paper is to discuss and highlight some of the glaring discriminations that the general class of bank depositors are subjected to and how the high inflationary rates adversely impact their living conditions.

A thorough analyses and interpretation of the various data like inflationary trends, changes in RBI Repo rates, the movement of Bank Deposit and Lending Rates bring out the stark reality about the discrimination the general class of Bank Depositors are subjected to. In conclusion several remedial measures are suggested to mitigate the hardship of the common depositors.

 

    A                                      BANKING SCENARIO IN INDIA

 

The Banking industry in India has a chequered past but the nationalisation of the major Banks in the 1970s brought about a fundamental change in the functioning of the Banks and their business outlook. The government control over the banks was found necessary to direct banks to fulfil their social objectives apart from their usual commercial activities.

 The years that followed witnessed an unprecedented expansion of Bank branches to semi-urban and rural areas not witnessed in any other part of the world.

Further under policy guidelines from the government the banks provided finance to hitherto neglected sectors like agriculture, small scale industries, small and retail business enterprises and individual personal loans, housing, etc.

Thus the banking industry drastically changed from EXCLUSIVE banking to INCLUSIVE banking.

The role of the Central Bank of the country viz., The Reserve Bank of India was also phenomenal. It controlled the rates of interest on bank deposits and also the loans. It exercised strict control over the banks by evolving comprehensive monitoring systems and supervision of their activities.

Because of all these controls and regulations the Banks in India have withstood the onslaught of various forces both Indian and global. It is a matter of great pride that no Indian scheduled commercial bank has failed (or allowed to fail) due to the strong Central Bank supervision as well as Government efforts. This is in stark contrast to the failures of the mighty and weak banks in the most advanced countries.

 

 

 Why is  bank a preferred option to depositors

 

Any person who wants to invest his funds looks for basically three factors

-the income /yields that his investments will fetch

-security of his funds

-liquidity (the ease with which one can deposit/withdraw funds)

 

The banks score very high on the second and third factors while they score only moderate or average on the first factor.

 

Due to the above positive factors and the high risk involved in other forms of investment like shares and mutual funds the flow of funds into the banking system has been consistently at a high rate.

 

It should be noted that due to this faith the bank deposits have kept growing in spite of the much lower returns offered by the banks compared to the other forms of investments.

 

  1. Role of bank deposits in the economy

 

The growth of bank deposits is crucial in more than one way to the economy of the country. Some of them are stated briefly here:

 

  • Banks have been a reservoir into which the savings of the vast majority of the population have been channelised into. Banks have given a great impetus to the savings culture.
  • With this resource base banks have advanced funds to both individuals and business enterprises for the phenomenal growth of various sections of the economy.
  • With their wide network of branches the banks are easily accessible to a large section of the population.

  

  1. Rates of interest on bank deposits

 

The rates of interest payable on bank deposits were for a long time controlled by the Reserve Bank of India. But now the individual banks are free to determine the rates of interest they pay on the bank deposits. Even in the case of savings bank deposits the RBI has recently allowed the banks to determine the rate of interest. The banks take into consideration various factors like market conditions, RBI indications and their own individual business compositions to fix the rates for different maturities. Hence there are small differences in the rates offered by individual banks for different maturities.

 

The following Tables highlight the present Banking scenario.

 

 

TABLE I

Composition of Bank Deposits                      

       .

  • Deposits with all Scheduled Commercial Banks                           

                                                                                                (Rs. In Crores)

            (as at 31-03-)          2008          2009        2010             2011               2012                

 

Demand Deposits            442056     472578       571019       641939         630300

% to Total Deposits           (13.31)     (11.63)       (12.02)        (11.43)          (9.80)

% Growth over prv. Yr                       (6.9)           (20.83)        (12.42)       (- 1.81)

 

Savings Bank Deposit     744051     874539      1109915     1351782       1528900  

       % to Total Deposits          (22.41)     (21.52)       (23.35)       (24.07)            (23.70)

 % Growth over prv. Yr                     (17.54)       (26.91)        (21.79)            (13.10)       

 

Term Deposits               2133953    2716084      3071522     3622712       4294500

% to Total Deposits          (64.28)      (66.85)        (64.63)        (64.50)           (66.50)

% Growth over prv. Yr                      (27.28)         (13.09)        (17.95)          (18.54)

 

Total                                3320061    4063203     4752456      5616432       6453700

% Growth over prv. Yr                     (22.38)           (16.96)        (18.18)        (14.90)

 

This table shows the various types of deposits held by the Banking system and their growth over the past 5 years. It is observed that after a sharp increase in 2009 there has been a steep decline in the rate of growth of deposits during the subsequent years.

 

                                                                  

(b) Maturity Profile of Bank Deposits (%)

 

                                                                    2009                 2010            2011     2012

- upto 1 year                                                48.6                   49.4            48.5       50.0

- over 1year upto 3 years                            28.5                   29.4             30.3       26.3

- over 3 years                                              22.9                   21.2             21.2       23.7

 

This table shows the percentage of deposits that would be maturing over different periods. It can be observed that almost 50% of the total deposits are held for periods less than 1 year. These deposits either carry no interest as in the case of Demand deposits and in other cases a very low rate of interest. Thus Banks pay a higher rate of interest only on 50 % of their total deposits and for a longer period.

 

 

 

 

 

(c) Deposits of Non-Resident Indians

                                                   (US$ MN)                         Rs. In Crores

                                                2010                2011                   2011           2012      

FCNR                                   14258               15597                 77400          80500

NRE                                      26251               26378               121200        162600

 

 

 

(d) Interest rates on deposits offered by a Public Sector Bank

Wef                        <2yrs                      2yrs to <3yrs       3 yrs to <5yrs          5 yrs & >        

 

05.07.2008           9.50                            9.00                               9.00

 

19.08.2008           9.00                                                                                             9.50

 

28.11.2008         10.50                                                                                              9.50

 

01.01.2009           8.75                                                                                              8.50

 

12.01.2009           8.75                           9.00                                                            8.50

 

15.04.2009                                             8.25                                                            7.50

 

01.06.2009                                              7.50                                                           8.00

 

03.08.2009           7.00                                                            7.25                           7.25

 

25.06.2010                                              7.00                                (5yrs to <8yrs)   7.25

                                                                                                          (8yrs to 10yrs) 7.50

 

03.12.2010           7.75                                                                   (5yrs to <8yrs)    7.75

                                                                                                         (8yrs to 10yrs)   8.00     

 

04.02.2011           8.75          1200days    9.25                               (5yrs to <8yrs)    8.75  

                                                                                                        (8yrs to 10 yrs)   9.50

01.08.2011           9.50               (3 yrs to 1199days) 9.00                (5yrs to 8 yrs)   9.00           

01.05.2012           9.00                               9.00                         9.00                         9.00

28.08.2013           8.75                               8.80                         8.80                         8.75

This Table shows the Interest Rates offered by a Public Sector Bank over the past several years for different maturities. It can be noticed that the Maximum Rate of Interest was 10.50% for deposits of maturity less than 2 years in the year 2008 that too for a very short period. However in the case of deposits with longer maturities of 5 years and above the Rates of interest have not exceeded 9 or 9.5%.

 

 

TABLE II

Composition of Bank Loans

(a)    Total Bank Loans                                 

                                                                                        (Rs. In Crores)

 (as at 31-03- )                     2008        2009              2010              2011          2012

 

Total Bank Loans              2476936     3000906        3497054       4298704   5074600

% Growth over prv. Yr                            (21.15)          (16.53)         (22.92)      (18.05)

 

(b) Non Performing Assets (NPA)        68220           81813     94084  (as per min.of fin)  

            (asper RBI)                                                                              41700        64900

 

(c) Maturity profile of

      Bank Loans    (%)

    - upto 1 yr                                             38.9                  38.9              37.8           35.9

    - over 1yr upto 3 yrs                              33.3                  33.3              35.4           36.3

    - over 3 yrs                                             27.8                  27.8              26.8          27.8

 

The above figures indicate the total amounts of Bank Loans, their growth over the past years, the amount of Bad Loans (officially referred to as Non Performing Assets) and the periods for which the loans would be outstanding. Almost 40% of the loans are repayable within a period of 1 year.

After a slight fall in the growth rate of loans in the year 2010 there has been normal growth rate during 2011 and 2012.

 

(d) Rates of Interest on Bank Loans and Advances (%)

Wef                    BPLR     Loans upto   ST Loans       Agr loans        Term loans (non Agr)                             

                                            2 Lac                  >2L         3L to 10L         >25L to 1 Cr

                                                                                                                >5yrs, Co.rated A         

                                                                             

09.11.2008 (upto) 14.00         14.00            17.50               14.25                   13.00

10.11.2008            13.25         13.25            16.75               13.50                   12.25

31.03.2009 (upto) 12.50         12.50            16.00               12.75                   11.00

01.04.2009            12.00         12.00            15.50               12.25                   10.50

12.08.2010            12.50         12.50            16.00               12.75                   11.00

13.12.2010            13.25         13.25            16.75               13.50                   11.75

04.02.2011            13.75         13.75            17.25               14.00                   12.25

05.05.2011            14.25         14.25            17.75               14.50                   12.75

01.07.2011            14.50         14.50            18.00               14.75                   13.00                          

01.08.2011            15.00         15.00            18.50               15.25                   13.50

01.05.2012            14.75         15.25

12.08.2013            14.20

The rates of interest charged by Banks on their loans depends on the type of borrower, the duration, the amount and the purpose for which it is taken as well as the credit worthiness of the borrower. The above rates are only a sample for the purpose of analyses and interpretation.

TABLE III

Chart of Income and Expenditure of Banks

As at 31-03-                     2008                2009                2010               2011          2012                  

Interest Income              308495         387816           415751              491665    655056

   % Growth over prv.Yr                          25.7                 7.0                   18.0         33.23

                                                               

Other Income                   60356           74880             78519                79564      85740

 

Interest Expended           208007         262548          272084              298891    430518

% Growth over prv.Yr                              26.2                 3.5                    9.0          44.03                   

 

Operating Expenses          77262           89076             99769             123129     137103                        

% Growth over prv.Yr                              15.30              12.0                 23.0          11.35

 

Cost of Funds                         5.80            6.05               5.09                  4.73        5.90

 

Operating Profit                83665         111349            122335            149210     173175

% Growth over prv.Yr                           33.09                  9.0                 21.0          16.06

Net Profit                            42726           52771              57109             70331       81658

% Growth over prv.Yr                                23.0                8.0                 23.0          16.10                 

 

Credit Deposit Ratio                                                        72.2                   75.7           78

 

Investment Deposit Ratio                                                 30.8               28.8           29.4

 

Explanatory Notes:

Interest Income –        This is the interest earned by Banks on their loans to customers

Other Income -            This is the income from commission, charges and return on their                                                                                

                                       Investments, etc.

Interest Expended-     This is the Interest Paid by the Banks on the Deposits of their 

                                           Customers.

Operating Expenses – This is the expenses relating to salary, etc.

Cost of Funds -           This is the average cost at which the deposits are held.                                       

                                     In other words this is the average rate of interest paid on the total                                                                                       

                                     Deposits held by the Banks.

Net Profit -                  This is the net profit of the banks after payment of tax etc.

Credit Deposit Ratio - This means that 78% of the deposits are given as Loans in 2012

Investment Deposit Ratio- This means that 29.4% of the deposits are invested in

                                              Securities, etc.

 

From this Table we can observe that the Net profits showed a sharp decline in the year 2010 but bounced back to the normal growth rate in the year 2011.In 2012 there is a steep increase in Interest income as well as Interest expended. While there is a less than normal growth rate of deposits the composition and maturity patterns remains almost the same. Further there is no steep change in the interest rates paid on deposits. Hence the steep increase of 44.03% in interest expended needs to be further analysed.

 

B                                  INFLATION

 

Inflation has a tremendous impact on the general population. Though the organised class of employees both in the public and private sectors get some amount of periodical reliefs there is a vast section of the population who have no such benefit. Further there is also large number of retired persons who do not have any pensionary or other retirement benefits. The impact of inflationary pressures is very severe and crushing in the case of such persons.

  

TABLE VI

Consumer price index for industrial workers

  Base 2001 = 100

 

Year       Index            % Change over      Rate of inflation                  Food

            Average     base yr        prev yr                 (point to point)      inflation

                                                                                (highest)              (highest)

 

2006        123         23%

2007        131         31%           6.5%      2007  Aug   133     7.26%

2008        141         41%          7.64%     2008  Oct    148    10.45%

2009        157         57%        11.35%     2009  Dec   169    14.97%

2010        176          76%       12.10%     2010  Jan     172    16.22%     Feb 27   17.87%

2011       192          92%         9.30%      2011 Nov   199    10.06%      Feb3      17.05%

2012       209         109%        8.85%      2012  Dec   219

                                                                2013 Aug   237

 

 Most of the Economists and the authorities highlight and discuss only the changes in inflation rates. The cumulative effects of the inflationary conditions are seldom highlighted. The inflation rates only give the percentage increase of the prices over a previous price level which was prevailing a month ago or a year ago. This does not portray a true picture of the price changes. However if we look into the actual Price Index Numbers than we can clearly understand the impact of the price increases over a period of time as shown in the above Table.

 

The rate of inflation has been continuously on the rise for the past 13 years. The average Index of Consumer prices has shot from the Base of 100 in the year 2001 to 209 in 2012. If simply put this means that if person spent Rs.100 for his living in the year 2001 he would be required to spend Rs.209 in the year 2012, an increase of 109% in 11 years. It can also be seen that the rate of inflation for food products is much higher.

 

 Reasons for Inflationary Conditions

 

There are several reasons for inflationary conditions in an economy.

Price of any article (unless it is regulated by the government) is basically influenced by the demand and supply of the commodity. If there is more demand than the supply the price of that article will tend to rise. The price will also rise if the cost of manufacture or production increases. The prices can increase even if there is hoarding or monopolistic trade practices which tend to create artificial scarcity conditions.

Inflationary tendencies raise its head due to fiscal conditions prevailing in the economy. When the government spends much more than the revenues it gets from taxes and other incomes it is called as Deficit Financing. To bridge this gap between revenues and expenses Governments resort to Borrowings by issuing various instruments like Treasury Notes, Bonds, loans, etc. Such borrowings tend to increase the Interest rates prevailing in the economy. Hence a huge Budgetary Deficit also leads to inflationary conditions.

 

     MEASURES TAKEN FOR CONTAINING INFLATION

 

To contain Inflation basically two types of measures are taken. One is the Fiscal Measures to be taken by the Government and the other is the Monetary Measures to be taken by the Reserve Bank of India.

 

The Fiscal Measures to be taken by the government would include the following:

Reducing the Budgetary deficit by increasing the revenues and reducing the expenses.

Ensuring the availability of essential commodities by properly utilising the reserve stocks available with the Government and distributing them through dedicated retail outlets at reasonable rates

Take strong measures to prevent hoarding of commodities

Controlling the prices of essential commodities

Importing of articles which are in short supply due to shortfall in local production

 

The Monetary Measures taken by the Reserve Bank of India would include:

Changes in the Deposit and Lending Rates of interest of the Banks

Steps to prevent loans being given by the Banks to hoarderers and black marketers

Ensuring availability of loans for productive purposes

Steps to reduce the Money supply in the Economy

 

Since the RBI has removed its control over the rates of Interest on Bank Deposits and Loans the RBI uses its REPO and Reverse REPO Rates to indicate the desired Interest Rates to the Banking System.

 

The REPO rate is the rate at which the RBI lends to the Banks.

The Reverse REPO rate is the rate at which RBI accepts deposits from the Banks.

The RBI’s REPO rates normally acts as a Bench Mark rate for Banks to fix their Deposit and Lending rates.

The following Table gives the RBI’s Repo and Reverse REPO rates for the past several years.

TABLE VII

Reserve bank of India’s Repo and Reverse Repo rates

Year                                             repo rate                        reverse repo rate

                                                               %                                          %

Nov    2006                                          7.00                                     6.00

Nov    2007                                          7.75                                      6.00

Nov    2008                                          7.50                                      6.00

Sep     2009                                          4.75                                      3.25

Mar     2010                                          5.00                                     3.50

April   2010                                          5.25                                      3.75

July     2010                                          5.75                                      4.50

Sep      2010                                          6.00                                      5.00

Nov     2010                                          6.25                                      5.25

Jan       2011                                          6.50                                      5.50

Mar      2011                                          6.75                                      5.75

May     2011                                          7.25                                      6.25

      June     2011                                          7.50                                      6.50

       Jul       2011                                          8.00                                      7.00

       Sep      2011                                          8.25                                      7.25

       Oct      2011                                          8.50                                      7.50

       Apr      2012                                          8.00                                      7.00

       May     2013                                          7.25                                       6.25

        Sep     2013                                          7.50                                       6.50 

(Source: RBI Bulletins)

From the above Table we can observe that the RBI reduced the REPO rate in September 2009 but thereafter because of the inflationary conditions the RBI has continuously increased the rate till October 2011 when it peaked at 8.50%.Only from April 2012 did the RBI started to reduce the rates marginally and brought it to 7.25% in May 2013. However due to persistent high inflation the RBI one again increased it to 7.50% in September 2013.

 

TABLE VIII

Comparison of Inflation rate, RBI Repo rate, Bank Deposit rate and Bank BPLR

 

Year         Inflation index      RBI repo rate   Bank deposit rate    BankBPLR

                                                                           (5yrs and above)

  • 123 00                                      
  • 131    75                                                   14.00
  • 141 50                      9.50                      13.25 
  • 157 75                      7.25                      12.00
  • 176 25                      7.75                      13.25
  • 192 50                      9.00                      15.00                                                                                                                                                         

 2012                   209                    8.00                      9.00                      14.75

 2013                   237                    7.50                      8.75                      14.20

 

            C                         ANALYSIS OF THE ABOVE DATA

 

We have seen above how inflation affects the people, the causes for inflation, and the measures taken by the government and the RBI to contain the inflationary tendencies. We have also briefly discussed the inter relation between the rate of inflation, the RBI REPO rates and the Bank deposit and lending rates. We will now look at the above data more closely to arrive at a number of discussion points which will enable us to come to conclusions and thereafter offer solutions.

In order to understand and interpret the data more meaningfully the various statistics have been put into CHART format as follows.

CHART I         MOVEMENT OF AVERAGE INDEX NUMBERS

 

 

 

 

  

CHART II CHANGES IN RBI’s REPO and REVERSE REPO RATES

 

 

 

  

CHART III CHANGES IN ROI ON BANK DEPOSITS

  

 

 

  

CHART IV COMPARITIVE CHART OF BANK ROI ON DEPOSITS &LOANS

 

 

 

 

CHART V COMPARISON OF INFLATION INDEX, REPO RATE, ROI ON BANK DEPOSITS 

                     AND LOANS  

 

 

 

  CHART VI COMPARISON OF BANK’S INCOME AND EXPENDITURE

 

 

 

 ANALYSIS

 

  1. The Average Inflation Index has moved from 100 in the Base year 2001 to 208 in the year 2012 and to 237 in August 2013. (Table VI and Chart I)
  2. The RBI has increased the REPO rates from 4.75% in September 2009 to 8.50% in October 2011. During the year 2011 itself the RBI has revised the rates upwards by as many as 7 times. Only in April 2012 has the RBI reduced the REPO rate to 8.00% and to7.25% in May 2013.However the rate was once again raised to 7.50% in Sep 2013. (Table VII and Chart II)
  3. When we observe the rates of Interest paid by the Scheduled Commercial Banks on Bank Deposits, it is found that when RBI reduced the REPO rate in SEP 2009 the Banks also brought down the ROI on Deposits to 8.50%. However ever since the RBI started its upward revision of REPO rates the ROI on Bank Deposits ( with maturities of 5 years and above ) have gone up only marginally and peaked at around 9.50% and is presently 8.75%. (Table I(d) and Chart III)

4 The Interest on Bank loans has also shown a consistent upward movement in keeping with the changes in RBI’s REPO rates. (Table II (d))

  1. It is observed that Deposit rates moved from a low of 7.25% in 2009 to 9.00% in 2011 (a change of only 1.75%), whereas Interest rates on Loans (BPLR) moved from a low of 12% in 2009 to 15% in 2011 (an increase of 3%).
  2. Due to the lower rates of interest offered on deposits since 2009 it is noticed that the growth rate of deposit which was 22.38% during 2008-09 has come down to 16.96% in 2010,18.18% in 2011 and to 14.90% in 2012.(Table I(a))
  3. Correspondingly the Growth rate in Advances has also shown a declining trend – from 21.15 % to 16.53% in 2010. However there has been a sharp increase in 2011 to 22.92% and 18.05% in 2012 much above the Deposit growth. (Table II)
  4. The Table III shows the Interest Earned on their loans and Interest paid by Banks on their deposits. The growth of Interest Income declined sharply in 2010 to 7% and Interest Paid on deposits to 3.5%. In the year 2011 the Interest Income grew by 18% compared to the Interest paid which grew by only 9%.In 2012 Interest Income grew by 33.23% and Interest Paid grew by 44.03%.
  5. The Net Profit also declined in the year 2009 but showed a handsome growth of 21% in the year 2011 in spite of a steep increase in the operating expenses. In 2012 there is an inexplicable increase in the Interest paid due to which the net profit growth is only 16.10%.
  6. The Cost of Funds which indicates the average interest at which banks are holding their deposits has shown a consistent decline from the year 2009 and was at 4.73% in the year 2011.
  7. The Credit Deposit Ratio which indicates the percentage of loans given against the total deposits has shown consistent growth despite the decline in growth of deposits.
  8. Table I (a) shows the composition of the Bank Deposits. In the year 2011 the Demand deposits constituted 11.43% and the Savings Bank Deposits 24.07% of the total deposits. While normally no interest is paid on Demand Deposits a low rate of interest is paid on SB deposits. Thus nearly 35.50% of the total deposits were either at no cost or at very low cost to the Banks. Thus higher rates of Interest are required to be paid only on 64.50% of the total deposits. Further from Table I (b) it can be seen that deposits with maturities beyond 3years were only 21.2% of the total deposits.

 

 

 

D                 INTREPETATIONS AND COMMENTS ON THE ABOVE FACTS

 

  1. For those who are employed in the Public Sector or the Private Sector, the impact         of inflation is more or less neutralized by increase in compensatory allowances which are linked to the Cost of Price Index as well as periodical revisions in the wages/salaries as per mutual agreements. 

 

  1. However for all those who are not in the organized sectors as well as those who have retired from jobs with no pensionary or other benefits which are linked to the CPI, their investible funds remain stagnant. Thus the income from their investments, if made in Banks, would have either declined or remained constant as per the Rate of Interest Chart shown above.  For reasons already stated only the returns from investments in Bank Deposits have been considered. With incomes remaining constant or even declining and the soaring rate of inflation, the lives of these persons would be very miserable. This situation can be mitigated only if these persons can keep on increasing their invested amounts every year which is not possible for the majority, since living expenses keep increasing with advancing age and inflation. The mitigating factor can only be if the Banks can give them a higher ROI in keeping with the Rate of Inflation.

 

 

  1. For reasons already stated in I.1 above the preferred savings medium are the banks by way of fixed deposits for many of the investors due to the risks involved in other forms of investments.

 

  1. To control inflation the RBI has continuously used the traditional monetary tool of its lending and borrowing rates which are known as the REPO and Reverse REPO rates. These are rates at which RBI lends to and accepts deposits from Scheduled Commercial Banks. Changes in these rates are supposed to influence the SCBs to fix their Deposit and Lending rates to their customers. As per Economic theories, high inflation is sought to be contained by increasing the rates of interest on lending by SCBs as one of the measures. The high interest rates would dampen the borrowing trends and also reduce the tendency to use it for speculative and hoarding activities. We can observe that the RBI has increased the REPO rates from 4.75%in September 2009 to 8.50% in October 2011. During the year 2011 itself the RBI has revised the rates upwards by as many as 7 times.

 

 

 

 

  1. It is observed that the rate of interest offered by banks is not in tune with the inflationary tendencies. In spite of the RBI hiking its   REPO rates frequently, to control inflation, the banks have been reluctant to increase the rate of interest on fixed deposits. Even when the interest rates are revised the increase is minimal and only with respect to a few maturities.
  2. RBI REPO RATES, BANKER’S VIEWS AND GOVERNMENT’S POLICIES.

The RBI’s REPO rates have been the focus of much criticism by the Finance Minister, The Bankers and the Business community.RBI has been maintaining its rates at a high level due to persistently high inflation rates. The RBI did reduce the rate in May 2013 but was once again forced to increase it in September 2013.The concern of RBI to control inflation has not been appreciated by either the Government or the Bankers who wanted the RBI to reduce the Rates to spur economic growth by offering Bank loans at cheaper rates. The RBI has been leading a lonely battle to fight inflation since the Government has not taken any measures to contain inflation by appropriate fiscal and administrative measures like supplying essential commodities at controlled rates, providing storage and marketing facilities for primary agricultural commodities, preventing black marketing, hoarding and speculative activities, Importing goods in short supply etc. The RBI’s monetary policy of high interest rates seems to have failed miserably. In spite of the high REPO rates the Bankers were reluctant to raise the Deposit rates and consequently their Lending rates. Thus the Depositors got a lower rate of interest on their deposits despite the high inflation while those who borrowed money from the Bankers got away with lower rates of interest even though the economic conditions warranted that loans are given at a higher cost. This led to a marked decline in the deposit growth rates of the Banks consistently for the past three years while the Advances have remained at a high level.

The Chairman of the State Bank of India has gone on record to say that the Bank will not change their interest rates in tune with the RBI’s REPO rates. He had demanded that the RBI reduce the Cash Reserve Ratio (CRR) so that the Banks will have more liquidity to lend. Even this demand was acceded to by the RBI.

The banks and Corporates were also permitted to go in for External Commercial Borrowings (ECBs) to raise resources from abroad when the country was facing a severe foreign Exchange crunch with widening current accounts deficit.

A moderate increase in the Deposit rates would have resulted in considerable deposit flow into the Banking system while at the same time giving the depositors a much needed relief from the high rate of inflation.

It appears that the Government, The Bankers, the Business community, except the RBI, have all joined together against the Depositors who are the back bone of the financial system helping the economy in various ways.

  1. RBI should ensure that the SCBs increase their Deposit Rates of Interest in keeping with the RBI policy indications.

 

  1. By offering better ROI on Deposits the Investors will be encouraged to keep their funds in the Banks rather than other forms of investments. This will increase the deposits of the Banks and hence they will have more funds to lend to their Borrowers. This will increase their interest incomes thereby enabling them to pay increased returns to the Depositors. With increased lending for productive purposes there will be growth in economic activities and hence the entire economy will be benefited. Further the profits of the Banks will also increase enabling them to pay more dividends to their share holders.

 

  1. The Net Profit of the Banks has consistently shown high growth rates over the past several years except in the year 2010.

 

  1. Though profits are crucial to the Banking industry, there should be a definite shift in favour of the large mass of Depositors who have reposed their trust and money in the Banking system as compared to the share holders.

 

  1. The Banks are also seen to pay higher rate of interest to individuals and Corporates who deposit large sums of money for e.g. those who deposit Rs.1crore and above. The recent scheme of SBI offers a high interest to Deposits of Rs.15 lacs and above.

 

  1. It is also a general practice among Bankers to not only offer better ROI on Deposits to High Net worth Individuals and Corporates but also offer them various concessions like reduced rates of Interest on their Borrowings, reduced or no charges for various services availed by them, etc. just to garner the prestigious business accounts. This reduces the incomes of the Banks and hence their ability to pay more interest to the Depositors.

 

  1. This has to be viewed as gross injustice, because those who are economically strong and are not in need of a higher income are benefited at the cost of the smaller depositors who are in dire need of a better income to offset the higher cost of living due to inflation.

 

  1. Banks also write-off large sums of money lent to their borrowers due to defaults in repayments of the interest and principal. In many cases this may be due to genuine difficulties faced by the borrowers. However there are many cases where Banks lend without due diligence, due to various reasons and also due to the overdrive of the Banks and their Agents to increase their loans and business. Thus a large sum of money is written off from the profits of the Banks every year which otherwise could have been used to pay a higher ROI to the Depositors as well as higher dividend to the share holders. The total amounts thus written off are not available in the public domain due to the secrecy norms of the Banking system.
  2. There are several reasons for Banks not increasing their interest rates on Deposits.
  • Banks can increase their interest on deposits only if simultaneously they increase their interest rates on their Loans and Advances.
  • There is a very strong lobby of the Bank Borrowers which wields considerable influence on the decisions of the Banks. They put pressure on Banks not to increase the lending rates as this will adversely affect their profits. 
  • The Bank depositors have never organized themselves to voice their grievances and interests. And hence their concerns are hardly ever taken care of by any one.
  • Though the banks have increased their Base rate of interest on their loans from a low of 12.00% in 2009 to a high of 15.00% in 2011 the interest on Bank deposits have moved from 7.25% to 9.00%.
  • An important aspect to be noted is that when Interest rates on deposits are changed they are applicable only to the fresh deposits made on and after the effective date. That means all the existing deposits will continue to earn the old rates of interest only. However when the banks change the rates of interest on their loans the revised rates are made applicable to all existing loans as well as all future loans.
  • The profit motive has been strongly ingrained even in the minds of the Public Sector Banks after their shares were offered to the public and were listed in the Stock markets. 
  • The data in Table II above indicates that there has been no decline in the Bank lending but have grown at a higher rate than the growth of their deposits. This indicates that the Bank’s loans have shown strong growth in spite of the increase in the Lending rates.
  • In contrast when the RBI liberalized the Interest Rates on Deposits of Non Resident Indians all the Banks went overboard and have increased the rates by over 6 percentage points. This again is due to the fact that NRIs have considerable influence on policy decisions. It would be interesting to note that the NRI deposits constituted only 2.51% (approximately) of the total deposits as on 31.03.2012.

 

  1. There is one more problem to which Bank depositors are subjected to. This is the Tax Deducted at Source (TDS) on the interest paid by the banks on the Deposits of their customers. As per the Income Tax Act Banks are required to deduct from the interest payable to their customers tax at the rate of 10% and remit the same to the I.T. department. Banks will issue to the depositor a TDS certificate in form 16A at the end of every financial year. Wherever the depositors feel that their total income (including the interest on Bank deposits) will not exceed the income tax exemption limits prescribed by the I.T. authorities they can submit a declaration in Form 16G/H to the Bank upon receipt of which the Banks will not deduct any Tax from the interest payable. It is to be noted that this Form 16G/H is required to be submitted to the Bank at the commencement of every Financial Year. From a very long time the limit fixed for TDS is total interest of Rs.10000/- and above payable at each and every branch. This stipulation has led to the following difficulties/problems :

 

  • Depositors have to submit Form 16G/H to the Bank every year in respect of all his deposits
  • Depositors have to collect Form 16A showing TDS and include it in their I.T. returns
  • Where at the end of the year the Depositor finds that he need not pay any Income Tax for that Financial Year and the Bank has already deducted Tax at source he has to necessarily file the I.T. Return to claim the refund of the TDS by the Bank. The refunds from the I.T. Department take a pretty long time. In other words the depositors are put to undue hardship both with the Bank and the I.T. Department.
  • In order to avoid Tax the Depositors tend to split their Deposits and keep them in several Branches/ Banks
  • The work load and paper work is very high for the Banks.
  • Any wrong deduction or non deduction of tax attracts severe penalties for the Bank Staff

 

 

 

 

E                            SUGGESTIONS AND SOLUTIONS

 

  1. The RBI should ensure that the Banks offer better rates of interest on their Deposits during times of inflation in keeping with the changes in the indicative RBI REPO rates.
  2. During times of high inflation the Banks can offer to its existing depositors also either a lump sum amount by way of a Bonus or a rate of interest over and above the existing rates of interest. This will to certain extent mitigate the sufferings of the Depositors due to high cost of living. There should be no necessity to close the existing deposits to avail the higher rates of interest.
  3. Banks should not hesitate to charge a higher rate of interest on their loans in keeping with RBI’s indicative rates so that their spread between the deposit and lending rates are sufficient to yield normal profits.

 

  1. Thus even if 50% of the growth in profits are given back to depositors by way of increased ROI/ or a bonus it would be a great boon to millions of depositors while at the same time it will not significantly affect the Profitability of the Banks.
  2. The gross discrimination against the small depositors should be stopped immediately and there should be greater equity in the business culture of the Banks.
  3. The Bank Depositors should come together under an Organisation to voice their concerns and demands so that all the authorities will look into their grievances.
  4. The Government and the RBI should take steps to protect the interests of the small depositors and should once again emphasise the objectives for which the Banks were Nationalised and also extend them to cover all the Banks including the Private and foreign banks. There is greater need for EQUITY and JUSTICE to the GENERAL CLASS OF DEPOSITORS whose faith in the Banking Sector has immensely helped in the country’s economic growth.

 

  1. The system of Tax Deduction at Source on interest paid on Bank Deposits should be totally done away with. The Indian Banks Association should forcefully take up this matter with the Government. The Income Tax Authorities should advice all the Bank depositors to include the interest earned on bank deposits in their I.T. Returns while computing the taxable income and pay tax wherever necessary.
  2. In order to boost the savings habit the Government can even give tax exemption on interest paid on bank deposits if not fully at least to the extent of say Rs.300000 from the entire banking system. This is fully justified and equitable considering that the Government has exempted from Tax the Dividend paid by the Limited Companies on their Shares and also the returns from investment in Mutual Funds which largely benefit the wealthy and very rich people. Thus the tax exemption on interest paid by Banks will benefit the small depositors, who as already mentioned in this paper are the Back Bone of the Banking system.

 

F    CONCLUSIONS

 

We can clearly notice from the above discussions that the General Class of Bank Depositors suffer gross negligence and severe discrimination from the Commercial Banks, the Reserve Bank of India and also the Government of India. With Incomes remaining almost stagnant or only showing marginal increases and the soaring Inflation year after year the Bank Depositors have been subjected to untold misery and hardships.

 

The solutions lie in offering better returns to Bank depositors either by way of a Bonus or a higher rate of interest on their Deposits during times of inflation.

 

This is eminently feasible if interest rates on Bank Loans are properly charged in keeping with RBI’s indicative rates, loans are granted after due diligence, recovery of bad loans is improved, write off of loans is brought down, High Net worth Individuals  and the mighty Corporate and Business class are not pampered with all sorts of concessions and privileges.

 

In order to provide further relief the Government should do away with the TDS on interest paid on Bank deposits and also exempt interest earned on Bank deposits from tax up to suitable limits.

 

Paper prepared by:

A.J.Jai Shankar,                                

                                                                                                                    

 

 

 

 

 

 

 

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Author

Kaushik Vichar

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