To those who keep asking whether the government is pushing small savers towards riskier financial instruments, the simple answer is a “big no”, claim economic pundits. In line with the government’s decision in March to pay less interest to small savers in the government’s sponsored small-saving schemes, the banks are also cutting interests that it pays on fixed deposits of varying tenures. This apparently is seen as a big policy discouragement towards the saving propensity of a common man who feels that the money kept in banks and in government papers (and the interest earned therefrom) is much safer than the volatile, albeit, higher returns of the stock markets. Supporters of the move, however, feel that the decision to reduce interest rates on savings is the fallout of the economic conditions that broadly reflect that there are enough savings in the system that now needs to be deployed in investment activities.
“To incentivise more job-creating investments in the economy, the government wants the cost of money to come down, but it cannot achieve that objective till it (together with banks) itself continues to pay higher interests on its various savings schemes,” said Ragvendra Nath, MD, Ladderup Wealth Management Company. Analysts feel the move to be a right step (especially under sluggish economic conditions) to increase transmission of lower interest rates down the line. Lower cost of credit is deeply desired by the RBI which feels that more monetary transmission (in the form of lower borrowing costs) is “critical to support the revival of growth”. Since majority of bank’s lending comes from deposits that people keep with them, paying less interest to the depositor is the only logical way left with them to eventually bring down the cost of money for borrowers.
Analysts say the bank’s lending to industrial and retail (home loan) customers earn them a good margin of returns, but the higher cost of deposits prevents them from extending loans at lower rates. So like borrowers, the higher cost of money is equally hurting the bank’s own potential profitability, said Nath. The bank’s overall lending for various economic activites (called the credit growth) has remained below 9% (year-on-year) during the last 3 years, a figure that looks unimpressive to almost all stakeholders. While lower credit offtake reflects the mounting bad debt problem that almost all nationalised banks are struggling with, the higher interest on borrowing money also prevented many from approaching banks.