There is a disparity between retail and the wholesale deposits. Banks tend to look for bulk deposits whenever they are faced with tight liquidity position and one of the easiest ways to meet their cash reserve requirements is by raising resources through this route even at higher rates
The Reserve Bank of India (RBI) has been de-regulating interest rates on bank deposits in bits and pieces over the last several years. While doing so, it has created an artificial divide between the rich and poor by taking an arbitrary decision in allowing banks to offer differential interest rates on deposits. In the case of fixed deposits, RBI had allowed banks to offer higher or lower than the normal interest rates for single-term deposits of Rs15 lakh and above. Again while de-regulating interest rates on SB (savings bank) accounts, the RBI once again created an arbitrary divide by stipulating that banks are free to offer different rates for SB depositors maintaining a balance in excess of Rs1 lakh in the account. The RBI has never given any rational explanation for allowing such discrimination between the rich and the poor depositors, nor has it come out with any empirical study to decide on the basis of differentiation and to assess the impact of such decision on the banks and on the public at large. And most of the banks offer higher than the normal rates to these rich depositors to attract them into their fold.
Surprisingly in its annual monetary policy for 2012-2013 announced recently, the central bank came out with a direction to the banks reading as under:
“84. The Reserve Bank has stipulated, inter alia, that banks should not discriminate in the matter of interest rate paid on deposits, except in respect of fixed deposit schemes specifically meant for resident Indian senior citizens and single term deposits of Rs1.5 million and above. However, it is observed that there are wide variations in banks’ retail and bulk deposits rates, making it unfair to retail depositors. Further, banks are offering significantly different rates on deposits with very little difference in maturities. This suggests inadequate liquidity management system and inadequate pricing methodologies. It is, therefore, advised that:
• banks should have a board approved transparent policy on pricing of liabilities and they should also ensure that variation in interest rates on single term deposits of Rs1.5 million and above and other term deposits is minimal.”
This direction of the RBI amounting to doublespeak is again couched in a language that leaves enough leeway for banks to go for bulk deposits at higher rates, more so when liquidity is tight and the normal deposit growth is not adequate to meet the credit demand. Besides, the RBI is well aware of the manner in which banks raised a whopping Rs2 lakh crore of deposits at high cost during the last week of March 2012 to window dress their balance sheets, making use of the freedom given to banks to offer higher rates on bulk deposits. As per media reports, during the end of the last financial year, the gap between retail and corporate deposits rose to as high as 3.5%.
If the wide variation in banks’ retail and bulk deposit rates is unfair to retail depositors as stated by the RBI, it is very clear that the original decision of RBI in permitting higher rates on bulk deposits itself was unfair and should not have been allowed in the first instance itself. In a country where 37% of our population is living below the poverty line, nearly 50% of the population does not have a bank account and where financial literacy even among the educated middle class is low, the very principle of pampering the rich at the cost of the poor, without any rational explanation, is neither fair nor equitable. Yes, this is at the cost of the poor, because, nearly 70% of the banking business in India is with public sector banks, and if they have to shell out more to the rich by way of higher interest, it is at the cost of the taxpayer, as the exchequer has to provide additional capital to these banks year after year even at the risk of fiscal deficit hurting the common man.
As mentioned above, the RBI feels that the inadequate liquidity management system and inadequate pricing methodologies followed by banks as the reason for disparity between the retail and the wholesale deposits. But the fact of the matter is that banks tend to look for bulk deposits whenever they are faced with tight liquidity position and one of the easiest ways to meet their cash reserve requirements is by raising resources through this route even at higher rates, as this is well within the norms presently laid down by the regulator.
While the retail depositors are at the mercy of the banks, the rich and the wealthy are able to extract better rates from the banks only because of the lacuna in the system created by the RBI in permitting higher rates for bulk deposits. There is a perfectly justifiable reason to allow a higher rate of interest to senior citizens who make a living from their earnings through the interest earned on bank deposits, but there is no rhyme or reason to offer higher rates to corporate and high net-worth individuals (HNI), who have much wider opportunity to deploy their funds profitably. In fact banks do have another route to raise resources from corporates and HNIs by offering market rates whenever they are hard pressed for resources and that is through the issue of Certificate of Deposits (CDs), which are governed by separate directives of RBI.
Instead of shedding crocodile tears for retail depositors, the RBI should come out with stringent norms and stipulate that the rate of interest offered to the retail depositors should be the cap or the maximum rate, and all bulk deposits should carry interest rates within this rate offered to the general public. This is in the interest of equity and fairness towards them and to ensure that the big sharks do not take the banks for a ride or take undue advantage of the banks’ predicament arising out of the tight money conditions prevailing in the market.
However, banks should be free to offer rates lower than the retail deposit rates to bulk depositors, if the banks so choose to keep their interest costs under control, having regard to their own funds position and cost of funds, etc. The only exception to be made is in respect of the interest rate offered to senior citizens, who for reasons stated above are to be allowed higher rates than that offered on retail deposits with a view to give them a helping hand to enable them to live with dignity during their sun set years.
(The author is a banking analyst and he writes for Moneylife under the pen-name ‘Gurpur’)
The complete Enrica Lexie/St Antony episode is not a private issue between an Italian ship and an Indian fishing boat. We cannot, as a country, afford to be lenient in this case; we need to know the Directorate General of Shipping is being so hesitant in taking any action in this case
The latest twist in the Enrica Lexie/St Antony episode, covered by Moneylife extensively in the past, has taken the breath of many in India’s maritime community for its sheer audacity. Even in the worst of colonial era rule over pre-Independence India did we not experience the kind of blatant arrogance that the Italians are displaying in this case?
Most certainly, compensation is rightfully due, and if paid by the Italians then there is a word that is often used in such cases as an ad-hoc interim compensation. This means, strictly with no strings attached and no subvention or compromising of the larger legal position. Interfering in due process of law and encouraging perjury, as it appears is happening, is serious.
Paying money is another matter altogether—something like taking responsibility for a moral payout, from a stronger entity to the weaker, more to help tide over difficult times. Certainly not to promote something like what the arrangement between the Italians and the families of the Kerala fishermen has done, which apart from disrespecting their own dear departed, is also interfering with the due process of law.
The complete Enrica Lexie/St Antony episode is not a private issue between an Italian ship and an Indian fishing boat, which can be settled by a payment like it would be for buying fish. There are many other parties involved. The larger issues involve maritime laws, economic security, energy security and future precedences. Apart from the central and state governments, there is the issue of the ship-owner. We still do not know who the beneficiary owner of this ship is. Then there is the issue of the 19 Indians onboard, held against their will for over two months now, unable to go ashore for things like medical check-ups or basic necessities of life. Would they not be entitled to sue the families for giving false complaints in the first case?
But the most important aspect of this episode on which we have yet no information in the public domain is the way in which the ship itself as well as the owners have not yet provided any information on the status of the log books, the voice data recorder, other data recorders and most of all, the information on the private and personal computers carried by people on board. I am unable to reveal my sources, but it is reliably learnt that:
The question arises—what would, typically, happen in such cases, in other countries? Here’s how it would in all likelihood go:
We cannot, as a country, afford to be lenient in this case. And we need to know why the office of the Directorate General of Shipping is being so hesitant in taking any action in this case.
(Veeresh Malik had a long career in the Merchant Navy, which he left in 1983. He has qualifications in ship-broking and chartering, loves to travel, and has been in print and electronic media for over two decades. After starting and selling a couple of companies, is now back to his first love—writing.)
The battle lines are being drawn and it is Equality Vs Liberty. In the Red Corner (Republican) Liberty. In the Blue Corner (Democrat) Equality. Sometimes to get elected you have to start a war
I realized that president Obama was being seriously underestimated when I read a pundit—in the Time magazine accusing Obama of playing small ball in the election campaign—no big ideas only the minutiae of governance and a pundit on CNN saying that the Obama campaign has finally found its theme—the Buffett Rule but it was the wrong theme. As the Buffett Rule will only provide revenues of $47 billion of revenue over ten years whereas the total budget expenditure would be $45 trillion i.e. the president was playing small ball.
The campaign has hardly begun and the punditry is coming thick and fast. I personally doubt that a billion dollar war machine (that is what the President's Campaign Fund is expected to be) is going to restrict itself to a small hall. Anyway, the theme of the Obama campaign seems to be already emerging and the Buffett Rule is only part of it, as is the theme of the Romney campaign.
It seems to be a clash of two basic values of the US Constitution. Liberty and Equality. In the Red Corner (Republican) Liberty. In the Blue Corner (Democrat) Equality. Just as in the French Constitution, Liberty, Equality and Fraternity are central to the US Constitution The president has already been taking the side of the little guy and the middle classes and is likely to paint himself as their champion. And his attempt to introduce the Buffett Rule should be seen in that light. The Buffett Rule (named after the billionaire Warren Buffett) is based on the idea that the Warren Buffett pays less tax (at a lower tax rate) than his secretary which is basically unfair. I suppose what that would mean is that while in most countries around the world the higher your income the higher your tax slab, in America the higher your income your tax slab goes down (with all the tax exemptions). That seems to be prima facie unfair. Hence the Buffett Rule provides that people earning more than a million dollar a year (around Rs5 crore) should pay as much tax as people with lower incomes. The commentators carp.
They say that it raises only $50 billion which is chicken feed in terms of the trillion dollars and counting the budget. They miss the point completely. It’s all about the symbolism. It also about president Obama saying that yes, you may be super rich but I will treat you the same as the little guy. The wisdom of such a move may be in doubt but not the symbolism. It is meant to empower the middle classes. And it plays perfectly into the biography of his Republican opponent Mitt Romney who is a millionaire several times over and was the president and head of Bain Capital, a large venture capital firm. His Republican contenders during the Republican primaries hit out at Mitt Romney for being a vulture capitalist rather than a venture capitalist.
Newt Gingrich was particularly harsh. But Romney is personally enormously rich and famously out of touch. He famously said that corporates are people too and said that he wasn't really concerned about the very poor of America. This biography will play directly into president Obama’s campaigning for the middle classes and the little guy. And Obama care as well as president Obama’s plans on contraception have to be also seen in this light as empowerment. And do remember that the middle classes outnumber the rich several times.
Mitt Romney has already taken up the gauntlet. While celebrating victory in New Hampshire after winning five states including New York, Mitt Romney spoke up for freedom. America he said was a land of freedom where people could achieve what they wanted to—the freedom to reach for the skies and to achieve your dreams. Curiously that too will dovetail into his biography. His father famously started by selling paint from the boot of a car and ended up as the governor of Michigan. He further said that getting rid of Obama care was about the freedom of choice as opposed to being governed by czars, boards and bureaucracy. And of course in any Republican campaign the Right to Bear Arms is bound to feature. Further he framed the women and contraception issue as a question of freedom of religion.
So the battle lines are being drawn and it is Equality Vs Liberty. Some are accusing Obama of starting a culture war. Sometimes to get elected you have to start a war.
(Harsh Desai has done his BA in Political Science from St Xavier’s College & Elphinstone College, Bombay and has done his Master’s in Law from Columbia University in the city of New York. He is a practicing advocate at the Bombay High Court.)