Cutting bank interest for senior citizens: Can the FM cut the extra 1% given to bank employees?

Senior citizens, who have no voice, are the soft target for the government. However, the government is not bold enough to withdraw the extra interest of 1% given by banks to their present and past employees, as they have the capacity to shut the doors of banks through agitation and strikes

As per the Business Standard report dated 1 February 2013, the finance ministry has sent a missive to public sector banks (PSBs) to withdraw the additional interest of half a per cent paid to senior citizens on fixed deposits to reduce the cost of funds of banks. This, the ministry feels, will help the banks to reduce their lending rates, as the Reserve Bank of India’s (RBI) decision last month to reduce repo rates by 0.25% has apparently not gone well with the ministry, which expected a bigger cut to spur growth.
 

The directive from the finance ministry to PSBs is nothing short of robbing Paul to pay Peter. If the intention of the finance ministry is to cut the interest cost of banks by withdrawing the additional half a percent interest paid to senior citizens by public sector banks, and pass on the benefit to borrowers by reducing the lending rates, the whole approach is not only ill-conceived but also a retrograde step affecting PSBs very badly in their future growth.
 

Read: RBI’s revised directive on bulk deposits does not help the large number of bank depositors
 

Here are a few reasons why ministry should reconsider its decision and withdraw the directive not only in the interest of regaining the trust and confidence of the banking public, but also to retain the sanctity of independence of the RBI in matters of deciding interest rates in the country.
 

1. As these instructions of the ministry apply only to PSBs and the RBI is not a party to this decision, private banks that are not bound by this directive of the government, hopefully will continue to pay the preferential interest to senior citizens as hitherto. This will result in shifting of deposits of senior citizens into private banks, which will be too happy to continue this small benefit to senior citizens who have a record of locking their deposits for long periods, helping these banks to reduce maturity mismatch in their assets and liabilities position.
 

2. Bank deposits as of now generate negative returns to the depositors because of the high inflation existing in the economy. The interest earned on bank deposits is fully taxable, not adjusted for inflation even for tax purposes, and the agony of tax deduction at source on bank interest is the added pain, making it virtually the most unattractive investment destination for the common man. Now that senior citizens, who depend on bank interest for their daily life, have to forgo this small additional interest, will also be tempted to shift their deposits into other investments like mutual funds, or gold ETFs, which will only worsen the deposit growth in banks, affecting their lending capacity and in turn profitability too.
 

3. As per the RBI report, deposit growth in the last few years has been lower than credit growth, thereby containing the capacity of banks to lend in a growing economy. In the current financial year, deposit growth during the first nine months has been said to be 13.3% year-on-year, which is lower than 16.7% recorded last year for the corresponding period.  But the credit growth continues to outpace deposit growth and said to be 16.3% during the first nine months of this fiscal. Therefore, the present step of the government to reduce interest rates given to senior citizens will have a negative impact on the progress of banks, adding fuel to fire so far as deposit growth is concerned.
 

4. As per the latest statistics, India’s gross domestic savings has fallen from 34% to 30.8% of GDP in 2011-12 and the biggest percentage fall has been in household savings, which has fallen from 10.4% to 8%. The government should have first arrested this fall by giving tax incentives to savers; instead, cutting interest rates on deposits selectively would be suicidal to banks as well as the economy as a whole. Any diversion of deposits into investment in gold, which is considered as hedge against inflation, will only worsen the trade deficit of the country, which has been a cause of concern both for the government and the RBI.
 

5. Good corporate governance requires the government to give total autonomy to the boards of banks to decide what rate of interest to offer to depositors, what rate of interest to charge to borrowers, and how to manage their income and expenditure portfolio within the guidelines of the RBI, if any, to achieve the annual business plan approved by it. Issuing of piecemeal instructions on the normal banking functions is not only an avoidable interference in the day-to-day functioning, it also robs the banks’ autonomy to function as independent institutions taking care of the interest of all their stake holders.
 

6. This is the third time in the last six months that the finance ministry has stepped on the toes of the RBI by giving directives to PSBs on issues that is mainly the prerogative of the RBI. While RBI is keeping a steady silence, what is not desirable is dual control of banks, as this will only weaken the powers of the RBI and serve neither the interest of banks nor of the economy.
 

Considered from all angles, the proposal of the ministry to withdraw the extra interest of a paltry half a per cent is most uncharitable to the senior citizens, who do not have any welfare schemes of the government to depend on during the sunshine years of their life. Moreover, the government is not bold enough to withdraw the extra interest of 1% given by banks to their present and past employees, as they have the capacity to shut the doors of banks through agitation and strikes, whereas the senior citizens who have no voice, are the soft target for the government, which appears to be in a tearing hurry to appease the big wigs of industry, at the cost of the ordinary citizens of this country, even before bringing down inflation to a comfort level of the RBI to bring down interest rates further.
 

Click here for other stories by Gurpur
 

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

Comments
kaushikkumar
1 decade ago
yes it is indeed true that the retirees and senior citizens are the soft targets and they cannot fight for eg revision of gratuity wef 1/1/6, benefits havenot been extended to non govt organisations and they are alllowed to pay revised gratuity wef 24/5/10 this is a discrimination,only barring a few exceptions eg. rbi/lic etc, will some one from media will highlight our anomoly. as a matter of gesture of goodwill govt should pay as honor and respect to senior citizens
Amit Sengupta
1 decade ago
The Govt has no care for the Sr. Citizens. They don't care for the future citizens either- going by the way they keep expanding the borrowings to fund today's, so called socio-economic needs. The Indian polity as with many other parts of the world are at its lowest of any credibility.
Sabapathy Narayanan
1 decade ago
Of late, your articles are highly ridiculous in the name of social service.
Please work for senior citizen and fight to get the justice.
Do not pull out the Bank employees unnecessarily.
It is the privilege for their work with Banking Industry.

Each and every industry gives privileges for their employees like Railway passes. It is a mere example.

Please fight for good things and not for unnecessay things.

Regarding Strike, everybody is doing and do not pin point Bank employees alone.

Regards,
Sabapathy Narayanan
MK Gupta
Replied to Sabapathy Narayanan comment 1 decade ago
For information of Mr. Sabapathy Narayanan, officials working in the Income Tax Deptt. DO NOT GET ANY EXEMPTION OR REBATE on account of income tax liability!
Ubaldo C DSouza
Replied to Sabapathy Narayanan comment 1 decade ago
You must be a bank employee to write what you have written. And you probably care only about today only and have not visualised Senior Citizenship!
nagesh kini
Replied to Ubaldo C DSouza comment 1 decade ago
What makes Mr. Narayanan think that writers are not bank employees and also not senior citizens?
Will his attitude change for the better if he is proved otherwise!
nagesh kini
Replied to Ubaldo C DSouza comment 1 decade ago
What makes Mr. Narayanan think that writers are not bank employees and also not senior citizens?
Will his attitude change for the better if he is proved otherwise!
nagesh kini
Replied to Ubaldo C DSouza comment 1 decade ago
What makes Mr. Narayanan think that writers are not bank employees and also not senior citizens?
Will his attitude change for the better if he is proved otherwise!
nagesh kini
Replied to Sabapathy Narayanan comment 1 decade ago
Mr.Narayanan, I wonder what makes you allege "articles are highly ridiculous in the name of social service...." Please mind your language before you write such stuff, suggest you re-read the matter before jumping the gun. There is no 'pulling up bank employees' whatsoever!
Why do you justify strikes by bank employees? Remember they too render essential services.
hasmukh
1 decade ago
It is a shame that the Govt. asks banks to cut interest paid to senior citizen, who are undoubtably hit the most by inflation. Govt. is fully responsible for not being able to control inflation. Also, Govt. is not able to prevent leakage of crores of Rupees, lost due scams and corruption.
Further, why favour bank employees by paying them higher int. of addl one pc.? even at junior most level, they already draw salaries, which could be much above the average income of Indian people.
nagesh kini
Replied to hasmukh comment 1 decade ago
Our senior citizen neta-gan Prez,PM don't seem to be affected by interest rates? Why should they ? For them everything is paid for.
God help the general public elders!
M G WARRIER
Replied to nagesh kini comment 1 decade ago
You are right. Politicians have ‘lifetime’ paid jobs. Even the bureaucrats who reach the level high enough to participate in policy formulation can continue to manage positions which will take care of their ‘lifestyle’ needs.
MK Gupta
1 decade ago
I just came to know of a more striking fact. A friend of mine was compelled to take around Rs. 3.5 lakhs as loan from Bank of Baroda for his daughter’s education.. The moment she was confirmed in her job in a company, the father decided to start repayment of the principal amount of the loan in installments as per the terms & conditions of the loan. Until then they have been paying regular monthly installments. In response to the letter of my friend’s, intimating the Bank that he intended to start repayment of theprincipal amount, the Bank rather said that there was no hurry at all and that he could start repaying the loan after one more year and till then they would deduct the interest only. My friend insisted for immediate repayment but, in reply, the Bank informed him curtly that, in that case, he would not get the 1% rebate to which he was entitled as per terms, possibly as the beneficiary was a girl student . This is simply unbelievable as the borrower was being punished for prepayment of the loan!. And, there is no way out, while the FM is busy working out the ways and means to penalize senior citizens!
nagesh kini
Replied to MK Gupta comment 1 decade ago
A fit case for the Bank's grievance committee and RBI Customers Service Dept. GM DG Kale.
MK Gupta
Replied to nagesh kini comment 1 decade ago
No, RBI hardly listens. Has anyone ever heard of a public domain grievances portal of RBI?
arun adalja
1 decade ago
whenever there is a rate cut senior citizens interest rates can be excluded to solve the problem and every three years review the rates and i think minimum 10% must be kept.
nagesh kini
Replied to arun adalja comment 1 decade ago
Hi look who's doing the "bank employees bashing"?
Have the numbers been crunched as to how much of interest goes to the bank employees - possibly peanuts!
Ubaldo C DSouza
Replied to arun adalja comment 1 decade ago
Arun Adalja's seems to be a viabble and equitable solution if the Government has the will, no vested interest and until scamsters from within the system do not find a loophole!
Krishnaswami CVR
1 decade ago
Gurpur, has indicated that ministry should not usurp the powers of RBI. Probably, he is under the false impression that it is the duty of RBI to fix the rate of deposits and advances. As a liberlisation process, RBI has already left it to market forces. Hence the action of finance ministry is only an advisory from owner and it is within the rights of the owner. ( I do not say whether the advisory is right or wrong.)

Secondly, the headline of the story is "glamorous." ( True, such headline only made me to read the article.) Mr. Gurpur should not have taken the bank employee bashing attitude. Does he have any statistics to prove that cutting down the additional 1% to employees would increase the profitability to a great extent? The deposits of senior citizens is sizable. Reduction in interest rates would mean something to the profitability. Mr. Gurpur should have also noticed that despite the higher interest rates offered by the private sector banks, senior citizens still prefer Public sector banks, due to the ownership factor and confidence.

Mr. Gurpur while bashing the bank employees, should have also noticed, that other Government undertakings such as railway provide free passes to their employees, which is certainly a drain on their income, as the employee force in Railways is larger. Does he recommend withdrawal of such passes?

The only Government employees who do not enjoy additional incentive on the products is postal employees. They are not eligible for postal services at subsidised rates.
Ubaldo C DSouza
Replied to Krishnaswami CVR comment 1 decade ago
At the moment, we are discussing interest rates and not railway passes,etc. Withdrawal of the 1% to serving employees will not do them any disservice - they have their increments and bonuses. Senior citizens have only the interest on deposits and there is nothing here to compensate them for inflation. Is Mr. Gurpur a Senior Citizen to know how and where it hurts.
Krishnaswami CVR
Replied to Ubaldo C DSouza comment 1 decade ago
ubaldo and mr.kini

i have only highlighted the inaccuracies of the article and has not commented upon the desirability of continuing the higher interest to senior citizens.
nagesh kini
Replied to Krishnaswami CVR comment 1 decade ago
I fail to see where there is "bashing" of bank employees as wrongly perceived by Mr. Krishnaswami.Can he clarify where his numbers of "sizable" senior citizens' deposits came from.They may be substantial when compared with those of other categories of individuals, of course Public Sector Banks are preferred essentially because the perceived 'sovereign guarantee' that back them.
No doubt the higher rate of interest for employees tantamounts to a perk a la discounted rail/road/air ticket for employee and even Mr. Gurpur,the writer, doesn't grudge it.
The MOF, and not the Regulator, the RBI directing only the PSBs is not fair.
If all employers have to give concessions to employees like postal employees, it will give rise to demands galore.
jaideep shirali
1 decade ago
This attitude of the government is expected, the UPA lives in a world where the 'aam admi' does not exist. Earlier, PPF rates came down, supposedly because it was unaffordable for the Govt, yet there has always been money for DA hikes and Pay Commission awards. The Railways seemingly operates for the benefit of its staff, with operating costs above 90% of revenues and no funds for safety or expansion. The time has come for citizens to challenge these policies that milk the taxpayer, to benefit the favoured few. As far as the Govt is concerned, there is no conflict of interest when babus decide their pay & expenses, only the citizen is shown the "conflict of interest" red flag throughout his life.
Krishnan
1 decade ago
Finance Ministry is headed by a bunch of persons servile to foreign interest and that of the MPs .God help the senior citizens.
nagesh kini
Replied to Krishnan comment 1 decade ago
I doubt whether God almighty will be in a position to do anything, we need to take care of ourselves, come what may!
arun adalja
1 decade ago
extra rate given to bank employees must be withdraw and it is to be added to rates for senior citi zens as their income is only interest and they cannot cope up with inflation.
R K Jain
Replied to arun adalja comment 1 decade ago
By withdrawing 1% extra from Bank employees(15Lacs approximately) whether working or retired employees of the Banks will not serve the purpose.The retired employees of the Banks are also Sr.Citizen and we should not ask for that.I may advise you that most of the bank employees after retirement do not get medical treatment or reimbursement or there is no Medical aid Scheme like CGHS and they have to bear their medical expenses themselves. Is there any Govt. Semi Govt. PSU (including State Govts.)which don't have any medical Scheme after retirement.Sr.Citizens of the country should unite and resist the move of the Govt.rather asking the withdrawl of 1% extra to Bank Employees, retired or working.Even after paying income tax whole life while serving what these sr.citizen get from the Govt.
Ubaldo C DSouza
Replied to R K Jain comment 1 decade ago
If it is cut from the Bank employees and given to Senior Citizens, it will still go to Senior Citizens but not to serving employees.
Ubaldo C DSouza
1 decade ago
Senior Citizens are like chaff in the wind, even sweepings, for the powers that be whose 'senior citizens' are comfortably provided for through the perks of the office of their political progeny. The treatment meted out to Senior Citizens today amounts to disowning them after their usefulness is expended and this is not only at official and Government level but also at the individual level. You said it all when you said that the Government dare not ignore the workforce because of the gun of agitation and strikes that they can hold to the head. The Seniors have no such gun or even the strength in their hands to hold and wield one.
R K Jain
Replied to Ubaldo C DSouza comment 1 decade ago
Rightly said Sir.
vns
1 decade ago
The UPA Govt led by an Academic Finance expert is working on expected lines-looking at the graphs and plots of the economic activities and matching with the Economics and Commerce books. So after the weaker sections of the society now it is the turn of the Sr. Citizens - the weakest of all - to be under the gullotine. In stead of taxing the reach in the richer world Manmohan and Chidambaram are out to squeeze the Sr. Citizens and the weak ones.
nagesh kini
1 decade ago
Pray who is the Banking Regulator in India - the North Block, New Delhi based MOF or the Mint Road, Mumbai located RBI.
That the MOF have the cheek to only direct the PSBs leaves others free to do as they please. It is time the PSBs are taken off the MOF radar. Just because the GOI has got majority holdings in PSBs they should remember that there are substantial private individual and institutional stakes too. A British stakeholder rightly hauled Coal India.
The Elders, after the gen-next kids in the block, will be next largest constituency turning out in large numbers to vote in 2014.
God help UPA2 if it chooses to antagonize either or both!
M G WARRIER
1 decade ago
Hopefully, in the coming days, there will be more debate on this issue. The motive of the finance ministry being betrayed in the way in which the instructions have been issued only to Public Sector Bank, calls for an immediate response. Propriety demands that such instructions with industry and social implications should have been issued through Reserve Bank of India after due deliberations. This does not appear to be the case here.

Those who are in the North Block now must be young and unaware of how interest rates evolved to the present stage. At the time of retirement in the early 1990's the retirement benefits deposited in banks or Post Office gave a return of around 12% p.a. Now the return has come down by 20 to 30% and inflation had its impact on cost of living. The 50 to 100 basis point additional interest on deposits of senior citizens, allowed to be paid by banks by Reserve Bank of India, has this background. A Senior Citizens Savings Scheme with higher than market-related interest rate and tax benefits also was introduced more than a decade back. The pressures on senior citizen’s personal budget have only increased on account of negative returns on his savings and escalation in costs owing to inflation.

Finance Ministry's present advice will have no impact on PSB profitability as the deposits already contracted may not get affected and senior citizens will move their deposits to other institutions/avenues giving better return, which could be unsafe making his plight worse in the coming days.
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