Senior citizens, who have no voice, are the soft target for the government. However, the government is not bold enough to withdraw the extra interest of 1% given by banks to their present and past employees, as they have the capacity to shut the doors of banks through agitation and strikes

As per the Business Standard report dated 1 February 2013, the finance ministry has sent a missive to public sector banks (PSBs) to withdraw the additional interest of half a per cent paid to senior citizens on fixed deposits to reduce the cost of funds of banks. This, the ministry feels, will help the banks to reduce their lending rates, as the Reserve Bank of India’s (RBI) decision last month to reduce repo rates by 0.25% has apparently not gone well with the ministry, which expected a bigger cut to spur growth.
 

The directive from the finance ministry to PSBs is nothing short of robbing Paul to pay Peter. If the intention of the finance ministry is to cut the interest cost of banks by withdrawing the additional half a percent interest paid to senior citizens by public sector banks, and pass on the benefit to borrowers by reducing the lending rates, the whole approach is not only ill-conceived but also a retrograde step affecting PSBs very badly in their future growth.
 

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

Here are a few reasons why ministry should reconsider its decision and withdraw the directive not only in the interest of regaining the trust and confidence of the banking public, but also to retain the sanctity of independence of the RBI in matters of deciding interest rates in the country.
 

1. As these instructions of the ministry apply only to PSBs and the RBI is not a party to this decision, private banks that are not bound by this directive of the government, hopefully will continue to pay the preferential interest to senior citizens as hitherto. This will result in shifting of deposits of senior citizens into private banks, which will be too happy to continue this small benefit to senior citizens who have a record of locking their deposits for long periods, helping these banks to reduce maturity mismatch in their assets and liabilities position.
 

2. Bank deposits as of now generate negative returns to the depositors because of the high inflation existing in the economy. The interest earned on bank deposits is fully taxable, not adjusted for inflation even for tax purposes, and the agony of tax deduction at source on bank interest is the added pain, making it virtually the most unattractive investment destination for the common man. Now that senior citizens, who depend on bank interest for their daily life, have to forgo this small additional interest, will also be tempted to shift their deposits into other investments like mutual funds, or gold ETFs, which will only worsen the deposit growth in banks, affecting their lending capacity and in turn profitability too.
 

3. As per the RBI report, deposit growth in the last few years has been lower than credit growth, thereby containing the capacity of banks to lend in a growing economy. In the current financial year, deposit growth during the first nine months has been said to be 13.3% year-on-year, which is lower than 16.7% recorded last year for the corresponding period.  But the credit growth continues to outpace deposit growth and said to be 16.3% during the first nine months of this fiscal. Therefore, the present step of the government to reduce interest rates given to senior citizens will have a negative impact on the progress of banks, adding fuel to fire so far as deposit growth is concerned.
 

4. As per the latest statistics, India’s gross domestic savings has fallen from 34% to 30.8% of GDP in 2011-12 and the biggest percentage fall has been in household savings, which has fallen from 10.4% to 8%. The government should have first arrested this fall by giving tax incentives to savers; instead, cutting interest rates on deposits selectively would be suicidal to banks as well as the economy as a whole. Any diversion of deposits into investment in gold, which is considered as hedge against inflation, will only worsen the trade deficit of the country, which has been a cause of concern both for the government and the RBI.
 

5. Good corporate governance requires the government to give total autonomy to the boards of banks to decide what rate of interest to offer to depositors, what rate of interest to charge to borrowers, and how to manage their income and expenditure portfolio within the guidelines of the RBI, if any, to achieve the annual business plan approved by it. Issuing of piecemeal instructions on the normal banking functions is not only an avoidable interference in the day-to-day functioning, it also robs the banks’ autonomy to function as independent institutions taking care of the interest of all their stake holders.
 

6. This is the third time in the last six months that the finance ministry has stepped on the toes of the RBI by giving directives to PSBs on issues that is mainly the prerogative of the RBI. While RBI is keeping a steady silence, what is not desirable is dual control of banks, as this will only weaken the powers of the RBI and serve neither the interest of banks nor of the economy.
 

Considered from all angles, the proposal of the ministry to withdraw the extra interest of a paltry half a per cent is most uncharitable to the senior citizens, who do not have any welfare schemes of the government to depend on during the sunshine years of their life. Moreover, the government is not bold enough to withdraw the extra interest of 1% given by banks to their present and past employees, as they have the capacity to shut the doors of banks through agitation and strikes, whereas the senior citizens who have no voice, are the soft target for the government, which appears to be in a tearing hurry to appease the big wigs of industry, at the cost of the ordinary citizens of this country, even before bringing down inflation to a comfort level of the RBI to bring down interest rates further.
 

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