Their Story. Who moved my rates?

Borrowers and depositors have always been at loggerheads when it comes to interest rates in the economy. While a steep cut can bring relief to a borrower, a similar move by banks on deposit rates can be unpleasant to many who still swear by bank deposits to park their savings. In the last year or so, as the Reserve Bank of India lowered its key policy rate, many banks have been quick to slash deposit rates by 1.5-2 percentage points. This has not gone down well with depositors, who argue that there has been no comparable relief on loan rates.

Adrian Alex, a financially savvy young executive working for a Bengaluru-based MNC, says that while the RBI has cut its policy rate by 150 basis points, banks have not reduced lending rates proportionately. “As an individual you end up earning less on your deposits but continue to pay more on your borrowings,” he says. He also has his numbers worked out. “About a year or so back, SBI deposit fetched me 9 per cent interest. Now it offers only 7.5 per cent. But interest on home loan is still 9.55 per cent, only about half a percentage point lower than before,” he adds.

He is also well in tune with the RBI’s recent tweaks in lending rate norms. “MCLR’s implementation hasn’t been helpful, as banks tend to clean up their balance sheets or deal with bad loan issues before passing on the benefit to borrowers,” he says.

To ensure better transmission of rates, the RBI had introduced the marginal cost of funds-based lending rate (MCLR), two months back. Instead of loans being priced against the erstwhile base rate, they are now pegged to the MCLR.

Adrian’s word to the wise, “pre-pay your loan in part, if you have surplus cash, rather than parking in deposits that don’t offer attractive rates. This way you can reduce outgo.” Remember, pre-payment penalty is done away with for floating-rate loans.

Others like Shailender Singh Chhabra share a more ‘glass half full’ kind of outlook and have made the most of rates moving lower, by shopping for better deals.

“I have taken a floating-rate home loan, so my bank charges a rate which is a mark-up over a benchmark rate. By renegotiating on this spread, I have been able to switch to a cheaper loan,” says Shailender, vice-president of a telecom-based company in Delhi.

He has also managed to do this free of cost, thanks to the ongoing tussle between banks to gain market share. “While the bank usually charges 0.5 per cent of the loan outstanding as switching fee, I was able to get it waived as other banks were willing to take over my existing loan. For fear of losing a good customer, my bank switched my loan for free,” he recalls.

While borrowers to some extent seem to have gained from falling rates, depositors have had no reason to cheer. Senior citizens, in particular, with no avenues for other income, have taken a hard hit.

Naganathan S says that he has parked his savings in bank fixed deposits and the interest he earns on them helps him meet his day-to-day expenses.

“In the last one year, banks have been slashing rates on deposits so that they can offer lower rates to borrowers. While there is nothing amiss about this, it should not be done at the cost of senior citizens,” he adds.

“It is true that banks offer marginally higher rates on senior citizen deposits than other deposits, but this is not sufficient. Consistency and stability matter more to senior citizens. There should not be too much volatility in deposit rates. I feel that banks should not have reduced deposits rates below 8 per cent,” adds Naganathan.

Banks usually offer 0.25 per cent to 0.5 per cent higher rates on senior citizen deposits across tenures.

Ranganath, a retired defence officer, says that if a deposit comes up for renewal now, people have little option but to settle for lower rates, as everyone is offering similar rates. “Not only bank deposits, but even rates on deposits schemes from the post office, such as National Savings Scheme (NSC) or the Public Provident Fund (PPF) or Senior Citizen Saving Scheme, have been reduced substantially this year,” he adds.

But hasn’t lower inflation, as the market pundits advocate, made a difference to real returns (actual return less inflation)?

“The fact that inflation is coming down is only on paper and is not evident in real life. Prices of which commodities have come down in the last one year? In fact, prices of vegetables have only gone up by 25-40 per cent in the last six months,” says Ranganath.

So, how have depositors coped with lower rates? Have they shopped around for better investment avenues? “You don’t have much option but to explore other investment avenues such as mutual funds. If your horizon is long, then switching to MFs is a good idea as they offer you much higher returns than bank deposits,” believes Shailender.

But aren’t MFs subject to market risk? Shailender is aware of the risk in mutual funds and says that it is only the surplus after parking money in deposits that he has invested in MFs. “Also, my relationship manager had invested the amount in a debt fund initially, which immediately offers me higher return than bank deposits. Then, every month a portion of my debt fund is moved into equity fund (systematic transfer plan),” he adds.

STP is indeed a good approach when you have a lumpsum to invest. Rather than investing in equities at one go, you can stagger your investments. This way, you can average out your costs.

According to Ranganath, there is another parallel market, where some assure returns as high as 30-40 per cent on other investments, but there is no guarantee on the safety of your money.

“We have no financial or legal muscle to fight such institutions if our money is siphoned off,” he adds.

For the salaried, there are very few options, says Adrian. Both gold and property are down. “If you can lock in your money for a long time, then PPF is still the best option as it enjoys EEE status. Your investment, interest and maturity amounts are tax-exempt,” he adds.

Even Ranganath feels that putting money in PPF is good enough. For Naganathan, who has always parked money in public sector banks, diversifying into some private banks that offer slightly better rates has helped.

What about non-banking finance company or corporate deposits that offer one percentage point or even more on some of their deposits?

“While corporate deposits may be offering higher rates, the procedure for investing in them is unclear. The features of the product, risk, etc., are not as evident as in the case of bank deposits and these companies need to publish the information in more detail,” says Naganathan.

While India Inc may still be pining for more rate cuts, depositors seem to wishing for the tide to turn quickly. “I hope bank rates increase in the next one year,” says Naganathan.