Pampering of borrowers is hurting depositors’ interests
While releasing the ‘Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks’ on May 28, the Reserve Bank of India highlighted the following: “Aggregate deposits growth (y-o-y) accelerated to 12.3 per cent in March 2021 from 9.5 per cent a year ago: metropolitan branches, which account for over half of total deposits, recorded nearly 15 per cent growth during 2020-21.”
From this, one may come to the conclusion that all is well with deposit accretion in banks. But a closer look at another statistics provided by the RBI paints a different picture. People make savings out of their earnings, and a part of these are invested in banks and the rest in other avenues like the stock market. To know whether banks are mobilising deposits optimally, the percentage of savings that has come in the form of deposit to banks must be looked at.
The RBI’s Annual Report for 2020-21 provides details of the financial saving of the household sector. The gross domestic savings, according to the report, have risen to 30.9 per cent of gross national disposable income (GNDI). During 2016-17, 6.3 per cent of GNDI was mobilised as deposit, whereas during 2019-20 it had fallen to 4.2 per cent of GNDI.
The shows that though the household savings have gone up, the percentage of such savings coming to the banking sector is declining.
The policymakers in government and the RBI must initiate measures to arrest this. They must understand that bank depositors cannot be taken for granted, they expect some reasonable real return on their savings. Over the years, the policymakers’ focus on borrowers has come at the cost depositors’ interest.
In 2011, the maximum interest rate offered by State Bank of India on deposits was 9.25 per cent. This has now fallen to 5.40 per cent. If ₹100 was needed in 2011 to buy certain items, today ₹185 will be required to buy the same, thanks to inflation and erosion in the value of the rupee. To have the same purchasing power, the depositor must earn at least 17.11 per cent as against the current 5.40 per cent. Such a situation has come about due to the continued pampering of borrowers. At the time of taking loan, the borrowers want as low an interest rate as possible. And when problems arise on the economy or business front, they want the payment of interest and principal postponed. If the account becomes an NPA (non-performing asset), they want one-time settlement which would involve hefty write-offs by banks. The policymakers, on their part, yield to the pressures of these borrowers.
For instance, due to the Covid-induced economic downturn, the RBI had instructed banks not to treat the loan accounts as NPAs even if the stipulated recovery is not done. The idea was that if the accounts are treated as NPA, the banks cannot charge interest and they have to make a provision out of profits for these bad assets.
The borrowers initially pleaded in the Supreme Court that they should not be charged interest for the pandemic period. Later, the demand was changed. They did not want the charging of compound interest, which was conceded by the court. The non-charging of compound interest will hit banks, which may ease this burden in the course of time by lowering the interest on deposits. Alternatively, if the government comes forward to bear this, then the burden will be on the taxpayers.
Borrowers do not pay more than the contracted rate of interest to banks even when they make bumper profit in any year. Why then do they expect banks to waive or reduce interest whenever they incur loss? The bank is not, and cannot be, a partner in the borrowers’ business.
All the pampering of borrowers unfortunately makes the banks pay less to their depositors, which is strange considering that without depositors’ funds, the banks cannot lend at all. Even the government is dependent on the investment made by banks by way of SLR (statutory liquidity ratio), which again is based on the deposits. This means that without bank depositors’ savings even the government’s borrowing programme will be hit.
It is time that depositors’ interest, too, are considered by banks.
The writer is a retired banker