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18
November 2016
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| Cut interest rate (The Total Investment & Insurance Solutions) |
Following huge cash inflows by customers due
to the demonetisation drive, several banks have announced a cut in interest
rates on deposits. This is double whammy for bank customers. On one hand, they
cannot withdraw more than Rs24,000 (per week) from their accounts and move to
other banks that are not cutting rates and on the other, they will earn less on
their money. Given the chaos around the country with people struggling to get
their money back even for weddings and medical expenses, banks should have been
barred from reducing interest rates until things are back to normal and people
have full access to their money, says a retired central banker. The Total Investment & Insurance
Solutions
"Why are banks taking advantage of
demonetisation to reduce interest rates? In a free market, one should be able
to move his or her money to another bank, which is paying more or not reducing
the interest rate. However, bank customers are not allowed to withdraw more
than Rs24,000 a week. So essentially, people are trapped into accepting lower
rates. It is only fair that banks should not be allowed to reduce deposit
interest rates until the situation is back to normal and full withdrawal is
permitted," said the banker.
State Bank of India (SBI), the country's
largest lender, cut fixed deposit (FD) rates on select maturities by up to
0.15%. SBI reduced rates on deposits from one year to 455 days to 6.90%, down
15 basis points, while keeping the 7% rate for deposits between 211 days to one
year unchanged. Taking a cue from SBI, two largest private sector lenders HDFC
Bank and ICICI Bank too reduced interest rates on FDs by up to 0.25%. United
Bank of India cut short-term interest rates by as much as 1%.
Canara Bank lowered FD interest rates by
0.05% to 0.25% effective from 21st November. Axis Bank too, cut its marginal
cost of fund-based lending rate (MCLR) by 0.15% to 0.20% due to higher cash
inflows by customers. The Total
Investment & Insurance Solutions
Banks are citing easy liquidity and slow
credit offtake as main reasons for cutting interest rates on deposits. However,
this is nothing but blatant misuse by banks of floating rate policies and 'free
hand regime' allowed by the RBI. When interest rates rise, banks immediately
step in to increase their spread, but fail to pass on the benefits to customers
when the situation is reversed. If, at all, banks have more liquidity and
credit offtake is slower, why are the lenders not lending more or even thinking
about reducing interest rate to attract more borrowers? And instead they are
cutting interest rates on deposits, that too when the customer is trapped?
There are lakhs of people, especially retired and senior citizens whose only
income source is the interest earned from bank deposits. Moreover, with banks
reducing interest rates on FDs, these people will be severely affected.
According to estimates, banks have collected
cash deposits of over Rs4 lakh crore following the demonetisation decision
announced on 8th November by Prime Minister Narendra Modi. SBI alone has
collected cash worth about Rs1.14 lakh crore between 10th November and 16
November 2016 through 240.90 lakh transactions. The Total Investment & Insurance Solutions
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