The sequence of cutting interest rates — both on deposits and loans — in response to the RBI’s steep 0.50 percentage point repo rate reduction, has been predictable. Banks have been reducing their deposit rates by a higher margin than the rates they charge on loans. Banks’ fixed deposit rates have taken a hit.
Leading banks have dropped their three year fixed deposit rates to below eight per cent.
The stickiness of bank lending rates — the reason why they are being reduced at a slower pace despite RBI’s nudging — is the subject of inadequate monetary transmission. Banks depend a lot on interest income for their profitability. The RBI has voiced concern over the relative opacity in calculating their base rates and has suggested a new formula.
There are plenty of steps that need to be taken in addition to those announced to deepen the financial markets without which monetary transmission will remain incomplete.
Meantime, from the banks’ side, it has been obviously easier to reduce their deposit rates. According to a rating agency, banks on average have reduced their fixed deposit rates by 130 basis points (1.30 percentage points) while reducing the lending rates by 50 basis points (0.50 percentage point).
The reasons are many but the most straight forward, though unpalatable, reason is that barring some large customers, bank depositors have no other option to invest their savings outside banks. The latter category includes senior citizens and those who depend entirely on interest income from banks.
Over the past few weeks, the Financial Scene column has been focussing on this category, eliciting a very large number of responses. Some of the responses are more than mere anguished cries over falling deposit rates eating into their livelihoods. Some of the practical suggestions will be highlighted in the coming weeks.
Falling interest rates and deposit growth
A few relevant issues here. How is it that banks are still hopeful of retaining, perhaps even growing their deposit base at a time of falling rates? Small savers may not have an option to go elsewhere but apparently there is plenty for the rich — the high net worth individuals (HNI) and corporate depositors. For these, the deposit interest rates are not the only means of sustenance. Taking the financial sector as a whole, the name of the game is to woo the rich in stock markets and indeed in banks also. How many of us know that bulk deposits (usually one crore and above) fetch a higher interest rate. And in the capital market too, despite lip service paid to them, small investors are a neglected lot. Most of them have kept away from recent IPOs.
Going against the grain of the spirit of nationalisation, even public sector banks are trying to match private and foreign banks. In a commercial sense, this attitude might be justified in the short run but is self-defeating in the long run.
The second point for discussion is whether the RBI and the government have taken note of the sensibilities of bank customers.
While the Finance Minister and senior officials had joined the chorus to cut rates, the RBI Governor appeared to be cognisant of the problems of savers. In a speech on September 18, ten days before the policy review, he had said that the RBI’s tasks included ensuring rates of interest that would satisfy “not just the vocal borrowers but also the silent savers.”
Have the silent savers got back their voice?
Post policy, this statement sounds hollow. The RBI Governor had, on the contrary, justified the cuts, being the outcome of falling inflation as being beneficial to the common man including senior citizens and others who are worst hit.
His argument that lower inflation can lead to higher real return might be technically correct but will not be appreciated by the common man who does not see any decline in the household budget year after year. Inflation expectations are still high and it should be beyond the comprehension of the common man to understand real and nominal returns.
Be that as it may, it may not be so much what the RBI Governor said but the context in which it was said that seems to offend some senior citizens. For them, there is no silver line in the falling deposit rates. Not for them the cheaper housing or automobile loans — they are barred anyway by reason of age.
An even greater lack of sensitivity is in the government’s announcement to review the administered rate on small savings including PPF and the rates offered by the post office. While rationalisation of these rates has, for long, been talked of, the government has not done anything drastic beyond linking the yield on the popular schemes such as PPF to the yield on gilts. The case for going slow is still strong and arises from the fact these savings mean so much to some citizens who stand to lose on falling bank deposit rates.
(This article first appeared in The Hindu dated October 12, 2015)