Financial Scene C.R.L. Narasimhan

Falling interest rates: a concern for depositors

Readers’ responses to our article on the subject published last week (see ‘Financial Scene’ Monday, September 7 — “Don’t ignore depositors”) have predictably been large. That is quite understandable given that falling interest rates on bank deposits raises livelihood concerns for those having no other means to support them. Even for those who do not face an immediate threat — such as those who are in employment now — falling deposit interest rates is still a concern.

Retirement is for everyone sooner or later. There would, no doubt, be very many challenges such as those relating to emotional and physical. But a financial crunch post-retirement is something to dread about. It will have ramifications on all aspects of retired life.

Viewed in any way, senior citizens are having a raw deal. In their ‘productive years’ they did not have the wherewithal to buy a house. Housing schemes and such other easy credit options were not available to them. Now in their later years the door is shut for nearly all of them; their advancing years being held against them. It is, of course, unlikely that a majority of those retiring can afford even the relatively small margin money needed to buy even a small apartment. This is because there would be several claims to the retirement corpus. Buying a house property being one of them. Arranging a marriage in the family is a capital expenditure. No wonder in the institution I worked before, HR counselling for the retirees would focus on these. More than just advice, enlightened institutions facilitated home loans. The objective is to facilitate a ‘soft landing’ on retirement.

This column does not aim to deal with superannuation and retirement. Its objective is to discuss the implication of falling bank interest rates on the welfare of senior citizens. In the process we shall discuss the points raised by our readers.

At the outset, we are amazed at the quality of responses. Almost all readers are aware of the context in which the current debate over falling deposit rates is being held. The nuances of a repo rate (interest rate) cut by the RBI and its impact on lending and deposit rates are appreciated.

But the key question is why when everyone roots for a rate cut to facilitate easier lending rates, there is not even a whimper of support for those who want at least the status quo in deposit rates?

The clamour for lower lending rates is led by powerful lobbies, chambers of commerce and the like with not a little support from the government. That lower interest is all that we need to revive the economy, is a myth that dies hard. For the government, it is a way of passing on the buck and avoiding tough reforms. Yet, the pressure mounts on the Reserve Bank of India before every scheduled policy statement and very often in between.

Meantime, depositors take a back seat. The other day the head of a leading private bank was being interviewed on a television channel on what made him take the lead in cutting base rate. Pointing out that rate fixation by individual banks is a function of cost of funds and how they view demand and supply of credit in the near future, he predicted a fall in deposit rates. There is not even one word about depositors without whose support the bank would not have made such impressive strides.

Unlike bank borrowers, depositors have very little choice to go anywhere else. Bank borrowers have a range of non-bank options, the capital market and external borrowings being two of them. Efforts to persuade bank depositors to invest in the stock market are fraught with risk and many such schemes such as the Rajiv Gandhi Equity Savings Scheme for first time investors flopped miserably. The very recent move by the EPFO (Employee provident fund organisation) to park a portion of retirement corpus in stock market instruments have had an inauspicious start with the extreme volatility that prevails on the exchanges.

Why do scams originate?

For the category of bank depositors who depend solely on interest, there is very little choice except to continue with the banking system. With returns getting squeezed there will be a temptation to be a little adventurous. This has had tragic results as repeated scams, Saradha et al show.

On its part, the government has made feeble attempts to give more choice. These include inflation proofing and recently gold bonds. These are for niche groups. For a majority of depositors a better deal from the government and banks is what is needed. We hope to discuss some of these options in future columns.

Meanwhile, a very perceptive reader Balakrishnan has questioned the ability of nationalised banks to return public deposits, the question being asked in the context of meagre deposit insurance and high level of NPAs which threaten to overwhelm the banking system.

Do banks, especially nationalised banks, run the risk of default? My answer would be a categorical ‘no’. More than balance sheet strengths, government ownership has helped banks.

No government will let scheduled commercial banks go under forced merger, takeover by a stronger bank. These are possible and have happened.

crl.thehindu@gmail.com


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