Small Savers, Big Blow

When Reserve Bank of India Governor Bimal Jalan announced a cut in Bank Rate and cash reserve ratio on April 29, Pradip Kumar, a pensioner, ...

When Reserve Bank of India Governor Bimal Jalan announced a cut in Bank Rate and cash reserve ratio on April 29, Pradip Kumar, a pensioner, was not enthused. Reason: He knows that very soon banks will start reducing interest rates on deposits along with loans.

Kumar 8212; who took voluntary retirement 8212; has already suffered a big hit following the successive reduction in interest rates in the last one year. Even as late as June 2002, the new generation private sector bank where he has deposited his retirement benefits used to give him 8 per cent interest rate on a one-year term deposit. It has fallen four times in the last one year to 5.75 per cent. And now with the latest reduction it has fallen to 5.50 per cent.

Solely dependent on his retirement benefits like EPF, gratuity etc, Kumar has suffered a hit of Rs 12,500 on his interest income on Rs 5 lakh deposit as rates have fallen from 8 per cent to 5.50 per cent now. The fall in interest rates has proved to be a nightmare for thousands of savers and depositors like Kumar.

Simultaneously, the interest rates on public provident fund PPF and other investment avenues have been going down. 8220;Well, the cut in interest rates will benefit industries and businessmen8230; and not pensioners like me,8221; Kumar says.

That8217;s not the end of his woes. Inflation rate has been on the rise, and crossed the six per cent level recently. 8220;If you take into account the inflation and the real interest rate, the deposit income is giving hardly any return to depositors.

continue with their bank deposits only because there8217;re no other safe investment avenues. Stock markets are sluggish and mutual funds are also in the same boat,8221; said a senior banker.

While PPF and other savings rates have been reduced several times to 8 per cent now, the government has been pushing for a cut in EPF employees provident fund rates as well. 8220;If interest rates on small saving schemes and term deposits fall further, it may prove to be a disincentive for savings in India. Savings rate will have to go up further. It8217;s vital for boosting capital formation, consumer demand and industrial growth in the country,8221; said an economist with a leading private sector bank.

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Depositors and savers are perturbed over the continuing preference of the government and the Reserve Bank of India RBI on softer interest rate. 8220;The soft interest rate environment should remain,8221; Bimal Jalan told the media after unveiling the cut in bank rate and CRR last week. The RBI had cut the savings bank SB rates 8212; the only deposit rate now controlled by the RBI 8212; of commercial banks by 0.50 percentage point after Jaswant Singh announced a reduction in small savings rates in the Budget. Now Indian Banks Association IBA is demanding another cut in SB rates, much to the chagrin of depositors.

Real beneficiaries

Who8217;re the direct real beneficiaries of the fall in interest rates? Definitely, it8217;s not the depositors or savers. Their income has been falling with every cut in bank rate and CRR. Well, the government and the business community have benefited the maximum from the fall in rates.

Companies which have huge loan liabilities have managed to bring down their interest outgo. Some steel, power and chemical companies have managed to reschedule their loans on the basis of the fall in interest rates.

The government 8212; the biggest borrower in the country 8212; will benefit maximum from the sliding interest rates. The government has set a gross borrowing target of Rs 1,66,000 crore for the current fiscal year. So every 0.25 percentage point reduction in interest rate will translate into huge savings for the government.

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If banks improve their efficiency and recover non-performing assets of around Rs 1,10,000 crore stuck among various defaulters, experts say, then can manage to strike a balance and offer higher interest rates to depositors.

Depositors are worried about another fall in interest rates in the coming months. 8220;There could be another 25 bp 0.25 percentage point CRR cut as we move into the second quarter of this fiscal. While recognising the sharp jump in inflation in recent months, RBI expects it to slide down over the next quarter as international oil prices have come off significantly,8221; says Rajat Jain, chief investment officer, IDBI-Principal AMC.

Savers have already seen the writing on the wall. The deposit growth of commercial banks has been slowing down in the last two years. Interestingly, 26 public sector banks clocked a growth of 12.73 per cent deposit growth in 2001-02 as against a 14 per cent growth in 2000-01 and a 15.54 per cent growth in 1999-2000.

The steep fall in interest rates has not led to a dramatic spurt in the economic growth, but created a big hole in the pockets of depositors. They are now hoping that their returns will not fall further in the coming months.