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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’)