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’)

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    COMMENTS

    nagesh kini

    8 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.

    Unintended consequences of central bank policies

    Every government policy and especially monetary policy has a very definite goal. But along with the goal there are always many unintended consequences. Some of these are the result of asymmetries of information

    US Federal Reserve chairman and other central bankers around the world have assured investors that injecting trillions of dollars into the global economy will have only positive effects. Despite many forecasts, inflation remains under control. Bernanke has stated that the purchases do not disrupt market functioning and that there will not be any difficulty in unwinding the massive positions. Of course, as the just released transcripts of the Federal Reserve meetings in August 2007 show, they did not see much risk of recession and forecast only a modest slowdown in growth. In short, they got it badly wrong.

     

    Every government policy and especially monetary policy has a very definite goal. But along with the goal there are always many unintended consequences. Some of these are the result of asymmetries of information. The truth, such as the real size and exposure of the shadow banking system in 2007, only becomes clear after the crash. There are unintended consequences that are known at the time. It is impossible to attempt to manipulate the markets on such a scale without them. Here are nine.

     

    1. Emerging Market Bonds: With interest rates of developed countries and sovereign debt at all time lows, investors are searching the world for any investments that promise adequate yields. January saw an inflow of $2 billion, the second largest on record. While understandable, the demand for emerging market debt has ignored some of the obvious risks. While emerging markets in general have had good growth, it does not make them either transparent or well regulated. This is especially true of emerging market junk bonds. For example there has been particularly high demand for the junk bonds of Chinese developers despite their weak sales and heavy debts simply because of their high yields. Past defaults of Chinese bonds have returned less than 25% on the dollar in agreed exchanges. Bankruptcies in most of these countries really don’t exist for all practical purposes.

     

    Read Gamble’s view on “Mistakes emerging market investors make”

     

    2. Developed Market Junk: The quest for yield has resulted in a “dash for trash”. This has pushed junk bond yields below 6%, slightly more than 100 basis points above the average investment grade bonds’ ten year median of 4.7%. Over the past decade junk bonds have traded at an average of 8.2% and as high as 23% during the financial crisis. Meanwhile corporate defaults have risen to their highest levels since 2009.

     

    3. US Municipal Bonds: Demand for the bonds of US municipalities increased sharply last year. The lowest rated bonds received the highest demand, because of their high yield. While yields were pushed to all-time lows, credit quality deteriorated. The rating agency Fitch also warned about the safety of these bonds. Fitch expects to downgrade dozens or even hundreds of municipalities in 2013. Their financial situation was made worse by low yields on their pension obligations which have now ballooned to $1.4 trillion for states and $217 billion for cities with populations over 500,000.

     

    4. Currency Wars: The creation of easy money has forced currencies like the dollar down helping local exporters, but at the expense of competitors in other countries. It has also resulted in a flight to safer and stronger currencies like the Swiss franc. This has resulted in increased restrictions on international capital flows and the possibility of currency wars. Brazil has been complaining about this, but with the advent of Japan’s new policy of monetary stimulus, it has been joined by countries around the world from Russia to Columbia, Peru and even Costa Rica. To protect its currency the Swiss National Bank (SNB) has turned itself into the world’s largest hedge fund increasing its holdings of currencies, bonds, stocks and even gold to $541 billion almost the size of Switzerland’s GDP. With the euro at $1.33, the SNB is making a profit, but if the euro falls 10% it would wipe out the SNB’s entire capital.

     

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    5. Reform: No government really likes reform. Both capital and labour create and invest in distortions formed by a regulatory system that favours them. Changing an inefficient system meets enormous and well organized resistance. A major financial crisis is one of the few incentives large enough to force governments to reform labour laws, bankruptcy systems, foreclosure laws, licensing and regulatory environments and social entitlements. Delaying or avoiding these crises may appear to be the safest course, but they simply allow governments to avoid facing inevitable problems. The result is to prevent the real changes that would insure growth.

     

    6. Bubbles: One of the main targets of the cheap money policy in Europe, the United States and China has been to stimulate the real estate market. This has been most successful in the US where it has finally encouraged buying. China, in contrast, may have simply exacerbated a bubble. But China is not alone. The money flowing out of China has resulted in a doubling of Hong Kong house prices and encouraged Singapore’s real estate to increase by 56% since 2009. The Chinese monetary stimulus has created demand for commodities in Australia and Canada along with real estate bubbles. House prices have increased 125% since 2000 in Canada and 150% in Australia. Brazil became the destination for much of the cheap money and its real estate prices increased by 140% between 2008 and 2011.

     

    7. Zombies: Massive and lengthy manipulation of interest rates stymies the creative destruction of capitalism. Investors, management and labour loath bankruptcies. Politicians hate large ones. Keeping inefficient unprofitable companies afloat seems helpful, but it prevents reallocation of labour and capital to new and better businesses. It prevents economic growth and harms healthy competitors. It also infects banks. They are happy to roll over loans that will never be paid back to avoid hits to their balance sheets. But it prevents them from making new loans to profitable. Politicians encourage the financial sclerosis because it avoids bailouts.

     

     Read more on Zombie Companies in Zombie companies: Pushed by central banks all over the world

     

    8. Corporate Profits: Low cost capital also distorts all corporate profits. The avalanche of corporate financing, at nominal rates, leverages capital and profits up, thus imitating growth. The leverage has divorced corporate profits from the economic cycle. It also lowers bank profits by flattening the yield curve. In the US the net interest margin has been reduced to 2.8% down from 4% ten years ago. This encourages banks to garner profits from riskier ventures like JP Morgan’s disastrous venture into credit derivatives by the London Whale.

       

    9. Credibility and Moral Hazard: One of the most effective tools of central banks and government policy is crucial to their proper function. The president of the European Central Bank Mario Draghi has been able to lower yield on Italian and Spanish debt by threatening to buy it without actually carrying through. By indulging in massive intervention in markets utilizing unproven methods, central banks are not only indulging in a vast economic experiment on a global scale, they are threatening one of their most vital tools. As the 2007 transcripts illustrated, they have very limited abilities to predict the results which can and do go horribly wrong.

     

    Perhaps the best statement about the consequences of cheap money was written by veteran fund manager Jeremy Grantham who wrote two years ago that “Adhering to a policy of low rates, employing quantitative easing, deliberately stimulating asset prices, ignoring the consequences of bubbles breaking, and displaying a complete refusal to learn from experience has left the Fed policy as a large net negative to the production of a healthy, stable economy with strong employment.” Sadly the Fed policy is now the global norm with ultimately similar effects.

     

    To access more articles from William Gamble, please click here.

     

    (William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)

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    Short-changing by international banks: Lessons for the banking fraternity and regulators

    Settlements and penalties of the last year have a lesson for every international bank, whether big or small, as they provide a peep into the alacrity of crimes committed by the white collar banking fraternity, predominantly in the developed world

    The just concluded 2012 can be remembered as the year of banking ignominy, as a number of big international banks were involved in scandals that were beyond easy comprehension. The sheer magnitude of the penalties imposed on them by different regulators was an eye-opener for all the banks in the world. Here is a short synopsis of the major banks involved and their alleged complicity in the art of short-changing the investors and or the State, leading to their prosecution and penalty or settlement. Most of the settlements arrived at were without accepting guilt, but were agreed to with a view to stop further prosecution and investigations. But these settlements and penalties have a lesson for every international bank, whether big or small, as they provide a peep into the alacrity of crimes committed by the white collar banking fraternity, predominantly in the developed world.
     

    Settlements agreed to and penalties levied on banks in the western world:
     

    1. In September 2012, Bank of America agreed to pay investors a whopping $2.43 billion (equivalent of nearly Rs13,000 crore)  to settle claims from shareholders led by pension funds, who had accused it of providing misleading information about the health of Merrill Lynch, which it bought just before the 2008 financial crisis. Besides, Bank of America also paid $150 million (about Rs800 crore) to the Securities and Exchange Commission to settle a lawsuit brought against it in relation to suppression of information about big bonus payments agreed by Merrill Lynch before the merger.
     

    2. In December 2012, Hongkong and Shanghai Banking Corporation (HSBC) agreed to pay a total of $1.9 billion (over Rs10,000 crore) to various US authorities to settle investigations into violation of US anti money-laundering regulations. The bank was alleged to have got involved in illegal transfer of billions of dollars from Iran and Mexican drug cartels to the United States.
     

    3. The Swiss banking giant, Union Bank of Switzerland (UBS) agreed to pay a total of $1.5 billion (over Rs8,000 crore) in fines to various authorities in the US, UK and Switzerland to settle charges of manipulating London Inter-Bank Offered Rate (LIBOR) , the global benchmark interest rates over the period between 2005 and 2010. UBS had said that it would pay $1.2 billion to the US Department of Justice and the Commodity Futures Trading Commission of the US, 160 million pounds to the Financial Services Authority of the UK and 59 million Swiss francs to the Swiss Financial Market Supervisory Authority, (FINMA). This is the second bank; afterBarclays, to be charged with rigging LIBOR and investigations are still on to identify more banks involved in this scandal.
     

    4. The Standard Chartered Bank Plc of the UK had to cough up a total penalty of $667 million (about Rs3,600 crore) in investigations by two different authorities in the US during 2012. This British bank had in August 2012 agreed to pay $340 million fine to the New York Department of Financial Services over Iranian sanctions, when the New York banking superintendent had termed this bank as a “rogue institution” that had shown contempt for banking regulations, leaving the United States vulnerable to terrorists, weapons dealers and corrupt regimes.
     

    Again in December 2012, Standard Chartered Bank agreed to pay a fine of $327 million to the US Department of Justice to resolve allegations that it violated US sanctions against Iran, Sudan and two other countries and moved millions of dollars through the US banking system on behalf of customers in the four sanctioned countries.
     

    5. In June 2012, ING Bank of the Netherlands agreed to pay a penalty of $619 million (over Rs3,400 crore) as per the settlement arrived at with the New York Department of Justice for allegedly falsifying the records of New York financial institutions and moving large amount of funds from Cuban and Iranian clients through New York banks, which violated economic sanctions. The US government through sanctions prohibits certain countries and entities from accessing US banking system as a safeguard against terrorist and money laundering activities, and banks violating these crucial regulations are penalized for such illegal actions.
     

    6. In August 2012, Citigroup entered into a $590 million (about Rs 3,250 crore) settlement with shareholders in a class-action law suit that accused the bank of suppressing vital information about its dealings in toxic derivative instruments before the sub-prime crisis of 2008. Though the bank denied any wrongdoing, it said that it agreed to the settlement to avoid uncertainty in continuing with the litigation, which may be dragged on for a long time. Citibank was one of the banks bailed out by the US government at the height of the financial crisis that hit American banks and financial institutions in 2008.
     

    7. In June 2012, Barclays Bank Plc, one of the largest banks in the UK agreed to pay a penalty of $453 million (about Rs2,500 crore) to US and UK authorities to settle allegations of rigging while fixing LIBOR, the benchmark interest rate, that caused political storm in the UK. This scandal, which cost Barclay’s CEO his job, resulted in sweeping changes in the way in which Libor is set, as LIBOR benchmark rates are used for trillion of dollars worth of loans around the world.
     

    8. In November 2012, JP Morgan Chase & Co agreed to pay$296.9 million (about Rs1,600 crore) to settle US civil charges of misleading investors in the sale of mortgage bonds before the financial crisis of 2008. As per the Reuters report, the Securities Exchange Commission (SEC) had accused JP Morgan of materially overstating in a prospects the quality of home loans that backed a $1.8 billion residential mortgage backed securities offering that it underwrote in December 2006.
     

    9. In similar case, along with JP Morgan, Credit Suisse, a Swiss bank, also agreed to pay$120 million (about Rs650 crore) to settle  with the Securities Exchange Commission (SEC) for the alleged negligence in the packaging and sale of risky mortgage backed securities. As per the SEC statement, the Swiss bank also misled investors by falsely claiming when it would buy back mortgage loans in two offerings in which borrowers had defaulted on their initial payments, and that “all first payment default risk” had been removed.
     

    What does this teach the banks and regulators in India?
     

    The first and the foremost lesson to be learnt from these episodes is that Indian banks operating in different geographies outside India should not only comply with the regulations of the home country, but also scrupulously follow and comply with the rules and regulations of the host country, where they operate, in order to ensure that they are within the ambit of laws in both the countries.
     

    The second important step every bank operating outside India should take is to ensure that they have put in place measures to protect the banks from the reputation risks. Any laxity in safeguarding the banks’ reputation under such adverse circumstances may result in winding up the operations to the detriment of the bank’s image.  Banks all over the world function only with the trust and confidence of the depositors.
     

    Thirdly, the Reserve Bank of India (RBI) too should play a very active role in closely monitoring the functioning of our banks outside India too. It is equally responsible for the orderly functioning of banks, both within the country and outside, so far as Indian banks are concerned.  Simply getting a certificate of compliance from the CEO of the foreign branch, as is done by some banks now, is not adequate in the face of the aggressive stance taken by the regulators in western countries. The RBI should, in its own enlightened self interest, call for a certificate of compliance of all local regulations from independent auditors in respective countries, who should be held accountable, if they fail to bring out any lacunae in the functioning of the banks concerned.
     

    At present, a number of public and private sector banks are vying with each other to get a license from the RBI to open branches abroad. The RBI should not only be discreet and selective in its approach, but also ensure that only banks with high capital adequacy ratio and with strong and effective risk management techniques are considered for such branch expansion, to jealously guard the interest of not only the banks concerned but also the fair name of RBI, as a large number of banks are owned by the central government in our country.
     

    As it is said, “ignorance of law is no excuse”, the RBI should ruthlessly enforce statutory and legal compliance both in domestic and overseas operations of every Indian bank and all domestic operations of foreign banks operating in India without fear or favour.
     

    Please click here to read other stories from Gurpur.
     

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

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