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FM directs banks to cut bank interest for senior citizens

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  • karmayog - tanya
    http://www.moneylife.in/article/cutting-bank-interest-for-senior-citizens-can-the-fm-cut-the-extra-1-given-to-bank-employees/31235.html Cutting bank interest
    Message 1 of 1 , Feb 13, 2013
      http://www.moneylife.in/article/cutting-bank-interest-for-senior-citizens-can-the-fm-cut-the-extra-1-given-to-bank-employees/31235.html

      Cutting bank interest for senior citizens: Can the FM cut the extra 1% given
      to bank employees?

      Gurpur | 12/02/2013 04:56 PM |

      Senior citizens, who have no voice, are the soft target for the government.
      However, the government is not bold enough to withdraw the extra interest of
      1% given by banks to their present and past employees, as they have the
      capacity to shut the doors of banks through agitation and strikes

      As per the Business Standard report dated 1 February 2013, the finance
      ministry has sent a missive to public sector banks (PSBs) to withdraw the
      additional interest of half a per cent paid to senior citizens on fixed
      deposits to reduce the cost of funds of banks. This, the ministry feels,
      will help the banks to reduce their lending rates, as the Reserve Bank of
      India's (RBI) decision last month to reduce repo rates by 0.25% has
      apparently not gone well with the ministry, which expected a bigger cut to
      spur growth.

      The directive from the finance ministry to PSBs is nothing short of robbing
      Paul to pay Peter. If the intention of the finance ministry is to cut the
      interest cost of banks by withdrawing the additional half a percent interest
      paid to senior citizens by public sector banks, and pass on the benefit to
      borrowers by reducing the lending rates, the whole approach is not only
      ill-conceived but also a retrograde step affecting PSBs very badly in their
      future growth.

      Read: RBI's revised directive on bulk deposits does not help the large
      number of bank depositors

      Here are a few reasons why ministry should reconsider its decision and
      withdraw the directive not only in the interest of regaining the trust and
      confidence of the banking public, but also to retain the sanctity of
      independence of the RBI in matters of deciding interest rates in the
      country.

      1. As these instructions of the ministry apply only to PSBs and the RBI is
      not a party to this decision, private banks that are not bound by this
      directive of the government, hopefully will continue to pay the preferential
      interest to senior citizens as hitherto. This will result in shifting of
      deposits of senior citizens into private banks, which will be too happy to
      continue this small benefit to senior citizens who have a record of locking
      their deposits for long periods, helping these banks to reduce maturity
      mismatch in their assets and liabilities position.

      2. Bank deposits as of now generate negative returns to the depositors
      because of the high inflation existing in the economy. The interest earned
      on bank deposits is fully taxable, not adjusted for inflation even for tax
      purposes, and the agony of tax deduction at source on bank interest is the
      added pain, making it virtually the most unattractive investment destination
      for the common man. Now that senior citizens, who depend on bank interest
      for their daily life, have to forgo this small additional interest, will
      also be tempted to shift their deposits into other investments like mutual
      funds, or gold ETFs, which will only worsen the deposit growth in banks,
      affecting their lending capacity and in turn profitability too.

      3. As per the RBI report, deposit growth in the last few years has been
      lower than credit growth, thereby containing the capacity of banks to lend
      in a growing economy. In the current financial year, deposit growth during
      the first nine months has been said to be 13.3% year-on-year, which is lower
      than 16.7% recorded last year for the corresponding period.  But the credit
      growth continues to outpace deposit growth and said to be 16.3% during the
      first nine months of this fiscal. Therefore, the present step of the
      government to reduce interest rates given to senior citizens will have a
      negative impact on the progress of banks, adding fuel to fire so far as
      deposit growth is concerned.

      4. As per the latest statistics, India's gross domestic savings has fallen
      from 34% to 30.8% of GDP in 2011-12 and the biggest percentage fall has been
      in household savings, which has fallen from 10.4% to 8%. The government
      should have first arrested this fall by giving tax incentives to savers;
      instead, cutting interest rates on deposits selectively would be suicidal to
      banks as well as the economy as a whole. Any diversion of deposits into
      investment in gold, which is considered as hedge against inflation, will
      only worsen the trade deficit of the country, which has been a cause of
      concern both for the government and the RBI.

      5. Good corporate governance requires the government to give total autonomy
      to the boards of banks to decide what rate of interest to offer to
      depositors, what rate of interest to charge to borrowers, and how to manage
      their income and expenditure portfolio within the guidelines of the RBI, if
      any, to achieve the annual business plan approved by it. Issuing of
      piecemeal instructions on the normal banking functions is not only an
      avoidable interference in the day-to-day functioning, it also robs the banks'
      autonomy to function as independent institutions taking care of the interest
      of all their stake holders.

      6. This is the third time in the last six months that the finance ministry
      has stepped on the toes of the RBI by giving directives to PSBs on issues
      that is mainly the prerogative of the RBI. While RBI is keeping a steady
      silence, what is not desirable is dual control of banks, as this will only
      weaken the powers of the RBI and serve neither the interest of banks nor of
      the economy.

      Considered from all angles, the proposal of the ministry to withdraw the
      extra interest of a paltry half a per cent is most uncharitable to the
      senior citizens, who do not have any welfare schemes of the government to
      depend on during the sunshine years of their life. Moreover, the government
      is not bold enough to withdraw the extra interest of 1% given by banks to
      their present and past employees, as they have the capacity to shut the
      doors of banks through agitation and strikes, whereas the senior citizens
      who have no voice, are the soft target for the government, which appears to
      be in a tearing hurry to appease the big wigs of industry, at the cost of
      the ordinary citizens of this country, even before bringing down inflation
      to a comfort level of the RBI to bring down interest rates further.

      (The author is a banking professional and writes for Moneylife under the
      pen-name 'Gurpur')

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