Money & Banking
RBI plans inflation-indexed bonds; may let banks buy back gold

Governor Subbarao also said the government and the RBI are working on various proposals to reduce gold imports


Mumbai: In a bid to wean away people from gold that is increasingly used as a hedge against inflation, the Reserve Bank of India (RBI) has said it is toying with the idea of launching inflation-indexed bonds (IIBs), apart from allowing banks to buy back gold, reports PTI.


“We introduced that (IIBs) some years ago but that didn't take up due to some design flaws. Since then, we have been trying to redesign it...” RBI governor D Subbarao said at the customary post-policy conference.


“From our side, the attraction of the IIBs is to wean people away from gold... if you provide an asset that gives inflation-indexed return (then they will invest in it).”


Certain issues were to be worked out, he said. “There were several questions apart from the design of the bond.


About which inflation index, do we peg to—WPI, CPI—and if we peg it to CPI, which is above 10% then what interest rate will be offered which will attract retail investors?” he said.


Subbarao also spoke about the issues related to timing the launch as the government may want to do it during falling inflation, while customers would want it during rising inflation.


Referring to the possibility of disruption of the G-Secs market due to launch of IIBs, Subbarao said, “One question which hunts us all the time is whether this will disrupt the G-Secs market.


“Because it is a wedge between the yield of IIBs and that of the G-Secs. However, if we educate investors they will see that this is pegged to inflation over a cycle and not to a particular point of time. Then, people will understand and invest in this”.


The governor also said the government and the RBI are working on various proposals to reduce gold imports. “We are shortly going to also consider whether we should allow banks to buyback gold. There are some regulatory prescriptions, where it is implied not very direct, says banks can’t buy back gold. That also we are examining.”


Higher gold import has taken a heavy toll on the economy with the current account deficit touching 5.4% in the second quarter. Recently, the government increased the import duty on gold to 6% from 4% to reduce inward shipments.



EMIs set to come down; banks to cut lending rates soon

Following the rate cut by RBI, bankers have indicated a reduction in interest rates for both lending and deposits


Mumbai: Borrowers can now look forward to their equated monthly instalment (EMIs) coming down soon as leading bankers on Tuesday said they will pass on the benefit of Reserve Bank of India (RBI) reducing its short-term lending rate and cash reserve ratio (CRR) to customers, reports PTI.


Bankers, however, did not say by how much or how soon they will reduce their lending rates.


Stating there is room for monetary transmission, State Bank of India (SBI) chairman Pratip Chaudhuri said, “The overall cost of funds gets lowered by Rs300 crore following the CRR cut which we will pass on to our borrowers without compromising on the net interest margin (NIM).


“But how and in which pocket will it be, would be decided soon. Our ALCO (risk management committee in banks) will be meeting tomorrow to finalise the details,” Chaudhuri told reporters.


Indicating a cut in base rate, Chanda Kochhar of ICICI Bank said there is going to be a transmission on the lending side, while on the deposits front, it will be wait-and-watch.


“There is going to be a lag but we will not take a hit on NIM. The cuts are positive for EMIs.”


Hinting that her bank has no immediate plan to lower deposit rates, she said, “It is not necessary to assume that deposit rates will come down with reduction in the lending rates.”


HDFC Bank managing director and chief executive Aditya Puri said, “The 25 bps reduction in the CRR will benefit us to the tune of Rs70 crore and there will be a rate cut. A case for transmission is there.”


Punjab National Bank’s KR Kamath, while welcoming the rate cuts, said there was a case for transmission but that hinged upon better numbers by the bank.


RBI earlier in the day cut CRR, the part of deposits banks have to keep with the central bank, by 0.25%, releasing Rs18,000 crore into the system.


Indian Overseas Bank CMD M Narendra, however, said it is a challenge for banks to pass on the benefits.


Narendra said that growth-inflation dynamics in the current quarter will decide whether the regulator will follow this up with further cuts. “Against this, recovery in growth is expected to be gradual through 2013-14, which again depends on global commodity price trends.”


“It will be, therefore, a challenge for banks to pass on the benefit of the rate cut to push growth and consumption demand without impacting the already slowing deposit growth,” he said.


Bank of Baroda chairman and managing director SS Mundra, however, said there will be an impact on his NIMs as lending rates come down without repricing of the deposit rates. He did not say whether there will be a cut in the lending rates.


SBI managing director A Krishna Kumar said, “a rate cut is likely. Rates on both advances and deposits may come down.”


According to Canara Bank executive director AK Gupta, the bank would consider interest rate cut in the light of RBI policy action.


Echoing the views, Bank of India executive director N Seshadri said most banks are likely to transfer the rate cut.


“Full transmission will happen on both lending and deposit rates. A 25 bps cut is most likely,” he said.


On poor deposit growth, about which governor D Subbarao expressed concerns while unveiling the third quarter monetary policy review in which he cut the repo and CRR rates by 25 bps, Chaudhuri blamed this partly on the flight of deposits to mutual funds.


“We have seen a flight of deposits as mutual funds are better on taxation and liquidity management,” he said.


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

Small depositors neither receive the service they have a right to expect nor returns on their deposits commensurate with the inflation prevailing in the country. In order to provide a fair deal to the small depositors, the RBI should introduce improvements in the deposit structure of the banks without any further delay

The Reserve Bank of India (RBI) has come out with revised guidelines on banks offering differential interest rates on bulk deposits effective from 1 April 2013. So far banks were allowed to pay different rates of interest on single deposits of Rs15 lakh and above without defining what is meant by bulk deposits. For the first time RBI in its directive issued on 24 January 2013, has said that all single rupee term deposits of Rs1 crore (Rs10 million) and above will be considered and called as bulk deposits and the following changes in its guidelines have been effected for compliance by banks.

1. All deposits accepted by banks for amounts of Rs1 crore and above will be considered as bulk deposits and such deposits alone can be offered differential interest rates effective from 1 April 2013.

2. All single rupee term deposits eligible for differential interest rates will include domestic term deposits and NRO and NRE deposits, as well. All such bulk deposits should have the same rate of interest for the same period of deposit and this should be made known to the public in advance. In short, banks will be required to publish two different interest rate charts, one for deposits of less than Rs1 crore and another for deposits of Rs1 crore and above. The interest paid by banks should be as per the rate charts and not be subject to negotiation between the depositor and the bank as is the present practise on bulk deposits.

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3. In respect of term deposits of less than Rs1 crore, the banks, on request from the depositor, shall allow withdrawal before maturity and banks cannot reject such requests. However, banks are allowed to charge a penalty for such premature withdrawal, which should be made known to the depositors at the time of making the deposit. At present banks charge a penalty varying from 0.5% to 1% being deducted from the interest rate payable on the deposit for the period for which the deposit has run till the premature withdrawal.

4. In the case of bulk deposits, i.e. deposits of Rs1 crore and above, the RBI has now given full discretion to banks to disallow premature withdrawal of all such deposits whether held in the name of individuals or otherwise. This is in variation with the present provision whereby banksare free to disallow premature withdrawal of large deposits held by entities other than individuals and Hindu Undivided Families (HUFs).

How does this affect the banking public?

Unfortunately, these changes do not help the small depositors in any tangible way. This may have some marginal effect on the big depositors who used to brow-beat the banks and get extra interest from them by negotiation, when the banks faced tight liquidity position. However, the RBI’s tinkering with these deposit rules may be to facilitate better liquidity management by banks and may bring down the volatility in the call money market to some extent. This may also stop any undue favours being shown by banks to big depositors, who can dictate terms by moving large amounts from one bank to another.

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What requires to be done to help small depositors?

The small depositors of banks are the neglected lot today and they are totally at the mercy of the big banks, though they are the people who provide the working capital for banks’ lending operations. They neither receive the service they have a right to expect nor returns on their deposits commensurate with the inflation that prevails in the country. In order to provide a fair deal to the small depositors, the RBI should introduce the following improvements in the deposit structure of the banks without any further delay:

1. The interest paid on all fixed deposits today is compounded on a quarterly basis, whereas banks collect interest on their loans and advances at monthly intervals. This is a clear discrimination against the depositors, who too deserve to receive interest at monthly intervals at the agreed rate. At present if you ask for interest on monthly basis, banks give you interest on your deposit at a small discount to the agreed rate as you are entitled for interest at the agreed rate only at the end of three months. This distinct disparity in paying and receiving interest by banks should be put to an end and equal treatment should be accorded to the deposits accepted and the loans granted by banks.

2. The depositors today receive negative return on their deposits with banks due to the high inflation continuing for a long time. In the case of savings accounts, the RBI cleverly gave the freedom to banks to determine the interest rate on such accounts, hoping that the banks will raise the existing rate of 4% to a reasonable level to offset the rise in cost of living due to the rising inflation persisting for the last over two years. But all the banks, barring a couple of small banks, have stubbornly refused to raise the interest rate causing immeasurable loss to the ordinary banking public, who have been suffering under the rising cost of living for the last couple of years. The RBI should immediately intervene to offer a reasonable rete of return to all SB account holders without any further delay.

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3.While the RBI has come out with guidelines prohibiting banks from levying pre-payment penalty to housing loan borrowers who wish to prematurely repay their loans, surprisingly the central bank has not thought it fit to give similar benefits to depositors who wish to withdraw their deposits before maturity. This blatant discrimination against depositors is a sad commentary on the role of RBI in encouraging inequitable and unfair deal accorded to the depositors of our country. At least the RBI could have brought this regulation in the present guidelines to all deposits other than bulk deposits, so as to provide some relief to those who seek premature withdrawal to meet unforeseen exigencies in difficult period in their lives.

4. Today, banks offer interest rates for different number of days like 200 days, 555 days, 1,000 days, etc. just to make comparisons difficult. Some banks advertise interest rates on the basis of yields instead of simple interest rates per year. There is a need to standardise all such pronouncements and advertisements made in respect of interest rates so that people are not misguided or confused about what is on offer. Just like the government making it mandatory for all packed food articles and consumer goods to be packed and priced in standard packs like 250 gm, 500 gm or 1 kg packs, etc, instead of 225 gm, 450 gm or 950 gm, etc to help people to easily compare the rates with similar competing products, banking products like period of deposit, etc should also be standardised like 46 days, 91 days, 181 days, one year, two years, etc, so that the public could easily compare the rates to arrive at a decision.  Besides, banks should specify only the annual percentage rate of interest, without any jargons like yield, etc so that laymen can easily understand the actual return on their investments. 

Apart from equity and fair-play towards small depositors, simplification and standardisation should be made mandatory for all the banking products for the benefit of financially less literate banking public that are in majority in our country.

To access more articles from Gurpur, please click here.

(The author is a banking professional, writing for Moneylife under the pen-name ‘Gurpur’)



nagesh kini

5 years ago

Earlier deposits of Rs.15lakhs+ were considered "bulk deposits" to make them eligible for a higher rate of interest. This upper limit presently stands at Rs. 1 crore.
This adversely affects smaller NPOs/NGOs carrying out charitable activities that are governed by laws that prevent them from investing their funds in any other modes to earn maximum returns.
Some banks insist that it should be a single deposit and not aggregate of more than one deposit that were placed from time to time out of surplus generation at different points in time.
The facility needs to be relaxed in the case of registered PAN holding approved charities.
After all the individuals, more particularly those in the high income brackets, generally do not go in for bank deposits which provide them far lesser returns when compared to other investing avenues. So there should be no need for such relaxations for super-rich individuals or corporates.
There should be far greater facilities and relaxations by way of higher rates of interest particularly in the case of deposits placed by elders, pensioners, widows, challenged and registered charities.

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