The Hindu Business Line : Striking an interesting balance

It has almost become a practice for India Inc to clamour for a reduction in the rate of interest whenever the Credit Policy announcement is expected. While the regulated interest rate structure has been considerably liberalised post financial sector reforms, some aberrations still persist.

The Benchmark Prime Lending Rate (BPLR) has assumed importance as other interest rates are fixed around it. Some segments, like exports, get credit at rates even below the BPLR. At the other extreme, interest rates go up to 30 per cent for microfinance institutions, most of which are unregulated.

No voices seem to be raised against this sort of distortion and no plea is being made anywhere for reducing such a high interest rate. While it is argued that this rate is market-driven, the apostles of market theology are silent about the distortions persisting in the interest rate pattern.

Interest rates on advances cannot be cut or raised by banks without considering the cost and source of funds mobilised for lending. The banker has four bosses to satisfy if he must remain in business.

Borrowers constitute the most important group, which plays a crucial role in influencing the bank’s health. They can help banks expand their top-line or depress their bottom-line by diminishing or aggravating the size of the NPAs.

Depositors constitute the next group that determines the size of the bank. The composition of this group has a bearing on the pattern of deposits mobilised. Share-holders are the third group; they expect banks to maximise profits and pay rich dividends. This group, however, is not as vociferous as the other two groups. The fourth boss is the regulator, which imposes certain conditions in managing funds, often forcing the banker to practise tight-rope walking.

The interests of these groups are at variance with one another, except that of the regulator, which does not look to monetary gains. Borrowers want credit at low rates of interest. Depositors demand a reasonably high return on their savings. Shareholders wish to have high dividends. Whose interest is the banker to safeguard?

Depositors’ interest ignored

Depositors get a raw deal from the banking sector in India, even after the introduction of financial sector reforms and the emergence of aggressive new generation banks in the private sector. Though the Reserve Bank of India has deregulated the interest rate structure, it continues to peg down the interest rate of savings bank deposits at 3.5 per cent.

The new banks have been trying to popularise savings bank deposits, as a part of their strategy to mop up low-cost deposits. But the rate of interest remains the same. Besides this, the archaic procedure of interest calculation continues. It is reported that, from April 2010, this procedure will be changed.

The banking sector handles 51.92 crore deposit accounts, according to the latest available data (as on March 2007). Against this, the number of borrowing accounts is only 9.44 crore. An important feature of the deposit accounts is the preponderance of savings bank deposit accounts — 37.35 crore of them, accounting for 72 per cent of the total number of deposit accounts. The banking sector has mobilised Rs 6,79,071 crore of savings bank deposits, which constitute 26 per cent of the total deposits. Rural branches handle 14.96 crore deposit accounts, of which 11.59 crore are the savings bank accounts. They mobilise 46 per cent of the rural deposits — Rs 1,17,413 crore. A review of the data relating to the deposits mobilised in all districts reveals that the more backward the district, the larger is the share of savings bank accounts.

Though the number of deposit accounts is not the same as the number of depositors, because of the multiplicity of accounts held by many, it can be used as a surrogate for depositors, in the absence of alternative data. Reducing the interest rates on deposits affects the interest of a disproportionately larger number of depositors than borrowers.

Which borrowers benefit?

The banking sector has a wide spectrum of borrowers, in which small borrowers — borrowing less than Rs 25,000 — are numerically the largest group, at 3.86 crore. These borrowers belong to the group that has been experiencing voiceless growth all along. Agriculturists have 3.22 crore borrowing accounts. The majority of them obtain credit at rates lower than BPLR. The interest rates vary from 8 per cent to 12 per cent. For crop loans, interest subvention is provided in some States.

Personal loans are one of the fastest-growing segments, with 4.12 crore borrowing accounts, and the amount outstanding is the second highest. Of these accounts, 0.50 crore are from the housing segment, where banks are vying with one another to offer housing loans on a fast track at 8 per cent onwards.

Loans for purchase of consumer durables and personal loans are the other two components. The bulk of the advances is made under 3.44 crore personal loan accounts through credit and debit cards. The hidden rate of interest charged here for delayed payment may be above 20 per cent. The rapid increase in the number of credit cards leads one to believe that nobody seems to grumble about this interest rate.

Industrial advances constitute 38 per cent of the total deposits, though the number of borrowing accounts in this category is just 0.32 crore. This is the group that is very vocal in demanding lower interest rates. Some segments in this sector, such as small and medium enterprises, get soft loans. The bigger and stronger corporates take advantage of external commercial borrowings, obtaining credit at relatively cheaper rates.

“The weighted average interest rate in respect of all loans and advances with a credit limit of over Rs 2 lakh” the Basic Statistical Returns of Scheduled Commercial Banks in India, March 2007, has indicated, “worked out to 11.92 per cent as at the end of March 2007, compared to 11.97 per cent the previous year”.

Should the interest of a large number of depositors be sacrificed to benefit a fewer number of borrowers? Depositors should not be forced to seek alternative havens to invest their savings. Borrowers should get funds at reasonable rates to keep the economy going. And the banker should have a minimum interest margin to remain in business.

(The author is a former CMD, Syndicate Bank. blfeedback@thehindu.co.in)

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