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.
 

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