Banks woo the depositors till they secure their account, and thereafter they are left high and dry. The RBI should ensure that the bank depositors are treated fairly and equitably so as to give the depositors their due reward for their contribution to the economy

Bank depositors are the pillars of strength for the commercial banks, and the funds provided by the depositors are used by the banks to on-lend to trade, commerce and industry, Banks make profits from the interest rate differential between the borrowing and the lending rate. Naturally, therefore, the deposit rates are lower than the lending rates. While the Reserve Bank of India (RBI) has been asking the banks to reduce this spread between the borrowing and the lending rates, a reasonable difference in rates of interest between the two is inevitable, as the banks have to make profits to remain in business. But there is no reason for banks to give the depositors a step-motherly treatment and deprive them of what is legitimately due to them. A few instances of glaring discrimination shown against depositors are mentioned below.

1. Compounding of interest on bank deposits

At present banks pay stipulated interest on all fixed deposits on a quarterly basis, i.e. compounded quarterly, and if any depositor seeks interest on a monthly basis, banks do give interest monthly, but only on a discounted basis, which means the depositor has to forego some portion of interest for availing the benefit of interest on a monthly basis. As is well known these deposits are used for lending by the banks, and all banks collect interest at the agreed rate from all borrowers at the end of every month. This means, while collecting interest on loans and advances, banks compound interest on a monthly basis, but while paying interest on deposits they compound interest on a quarterly basis, which is nothing short of discrimination against the depositors. And this has the blessings of the regulator, as RBI, while permitting the banks to charge interest on monthly basis to their borrowers never instructed the banks to compound interest on deposits also on a monthly basis. The extra benefit accruing to the individual depositor from monthly compounding may not be that large, but it is unfair to deprive the depositors this small benefit when the banks themselves enjoy this benefit on their lending portfolio.

2. Withdrawal of deposits before maturity

The banks follow a practice of levying a penalty of up to 1% whenever a depositor withdraws his deposit before maturity.  A few banks charge a penalty of 0.50% and some others charge a penalty of 1% as this is left to the discretion of individual banks.  In effect, when a depositor withdraws his deposit before the due date, he does not get the interest at the contracted rate, but he gets interest only at the rate applicable for the period of deposit lying with the bank less the penalty of up to 1% as mentioned above. While paying interest at the rate applicable for the period of deposit is reasonable, what is unfair is the additional penalty levied for such withdrawal, as this is neither reasonable nor equitable for the following reasons.  
 

Here again the depositors are discriminated against, because, the banks in all their agreements with their borrowers have a clause empowering the banks to recall the advance at the discretion of the banks, and banks are not liable to pay any compensation to the borrower for any such premature withdrawal of loans from the borrowers. This obviously means that the banks retain their right to withdraw the working capital loans given to the borrowers before the maturity date without any penalty; they are not willing to give the similar rights to their depositors to withdraw the deposits before maturity without any penalty.
 

Moreover, recently RBI has directed all banks not to levy penalty on housing loan borrowers, who pre-pay their loans before the due dates. While this is good for the borrowers, the same benefit of waiver of penalty has not been extended to depositors who withdraw their deposits before maturity. In actual practice, nobody would like to withdraw deposits before maturity unless on unavoidable circumstances, as it will result in loss of interest. So much so, if only this penalty clause for pre-mature withdrawal of deposit is removed, it will give a lot of comfort to the depositing public, and banks will be able to get more long-term deposits than at present, helping them to reduce the mismatch in their liquidity position as well.

3. Payment of interest after maturity of deposits

At present, banks do not pay any interest after the maturity date of the deposit, if it is not renewed from the due date. One of the public sector banks in its website has stated that in respect of very old matured term deposits outstanding prior to 1 August 1998, simple interest at the current saving bank rate will be paid for the overdue period of the deposit only if the said deposit is renewed. It also states that in the case of death of depositors after the date of maturity of the deposit, interest will be paid at saving bank rate operative on the date of maturity, from the date of maturity till the date of payment as per the RBI guidelines.       
                               

On the contrary, banks charge a penal interest at 2% over the agreed rate on all overdue loans and advances, and on all interest unpaid on such loans. While the bank is entitled to charge penal interest on their receivables, it is not willing to pay any interest after the maturity of the deposit, unless it is renewed from the due date, except in the case of deposits of deceased customers, where RBI has mandated payment of interest at a paltry savings bank rate only. Besides, banks have stopped sending notices of due dates of deposits to customers, and if for any reason they fail to withdraw the deposit on the maturity date they lose the benefit of interest for the expired period from the due date of deposit.
 

Is it fair to deprive the benefit of interest to the depositor when the bank has enjoyed the benefit of funds by using it for their lending operations?  In fact, banks in the US follow the doctrine of unjust enrichment, and pay interest on any amount lying with them unclaimed for any length of time. This is based on the principle that morally and ethically the one who gains a benefit that he or she has not paid or worked for should not keep it to the rightful owner’s detriment. It simply means that a person shall not be allowed to profit or enrich himself inequitably at another’s expense. It is necessary for banks in India to follow this principle in the interest of not only equity and justice, but also for retaining the good will and custom of depositing public.

4. Interest rate on Savings deposits

Of late you would have observed that politicians, industry associations, captains of industry and all and sundry have been clamouring for reduction of interest rates on loans and advances granted by banks. And this call for reducing the interest rate on loans became louder by the day, when the finance ministry officials, including the finance minster, and the RBI officials including the governor joined the chorus, chiding the banks for not reducing their lending rates even when the RBI reduced the CRR by 0.25% recently.   
                                                  

In striking contrast, have you ever heard a single voice being raised or a write up in the media demanding increase in interest rate on saving deposits, which has been de-regulated by RBI for more than six months now? The RBI has washed off its hands by simply giving freedom to banks to fix their own interest rate on SB deposits, but neither the public sector banks nor the big private banks, (barring three new generation small banks), have thought it fit to increase the interest rates on SB deposits so far. The middle-class and the lower middle-class, who form the majority of the banking public, have been suffering silently by the galloping inflation due to which a large majority of our countrymen and women are not able to make both ends meet in their daily life. The rising inflation, which has reached double digits, has been affecting the capacity of our people to save, and this is reflected in the falling rate of growth of SB deposits in banks. As per the RBI report, the percentage of growth of savings bank deposits in all scheduled commercial banks has fallen from 26.9% in 2009-10 to 21.8% during 2010-11.  But neither the RBI nor the finance ministry officials have shown any concern for the depositors, who have been at the receiving end of rising cost of living and getting negative return on their investments in banks.  
 

Need to reverse this trend  
                 

These are some of the areas where Indian depositors receive a raw deal from the commercial banks because they do not have a powerful lobby to champion their cause. And the frontline media is busy highlighting the woes of big industrialist borrowers, who demand their pound of flesh from the banks who oblige them at the cost of poor depositors. The government is keen to expand the reach of banks in unbanked areas propagating financial inclusion, but has done precious little to incentivize savings through the banking system. Bank deposits are no longer attractive, post inflation, and with the interest on bank deposits being subject to income tax, they are the least preferred avenue for investment today. This has resulted in considerable fall in financial savings in our country as rich people prefer to buy gold, which in rupee terms has given 23% annual return for last five years. The RBI, in its latest annual report for the year 2011-12, has stated that the financial savings of Indian households, as a proportion of GDP, plummeted to 7.8%, the lowest during the last 20 years.  
 

The banks woo the depositors till they secure their account, and thereafter they are left high and dry unless otherwise directed by the regulator. It is high time, therefore, the RBI should ensure that the bank depositors are treated fairly, squarely and equitably in the interest of not only continued flow of savings into the banking sector, but also to give the depositors the due reward they deserve for their contribution to the economy of our country.             
                                   

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