Wednesday, December 2, 2015

Small savings deposit rates under threat

The Reserve Bank of India (RBI) will shortly finalise the methodology for determining the base rate based on the marginal cost of funds.These moves should further help transmission of policy rate cuts to borrowers.With this new methodology banks would be able to make incremental loans on the marginal cost pricing while historical or legacy loans will be on the base rate. The government is examining linking small savings interest rates to market interest rates. These moves should further help transmission of policy rates into lending rates.

Small savings constitute only 5% of the bank's total deposit.But the banks have for long been arguing that the transmission of monetary policy easing has not happened so far due to high small savings rates.Small savings schemes include the National Savings Scheme, Kisan Vikas Patra, post office deposits, and Public Provident Fund. Their interest rates vary from 8.4 per cent for a one-year deposit to 9.3 per cent for the five-year Senior Citizens Savings Scheme.Bank deposits have fallen more in the past one year compared to the lending rate. While the RBI reduced the repo rate by 125 bps to 6.75 per cent in 2015, the base rate — which is the benchmark for all loan rates — has fallen by 50 to 70 bps.Deposit rates have fallen by around 150 bps, for one year maturity. To add to the depositor’s woes, inflation has been inching up. Consumer price index-based inflation, or the retail inflation was at a four month high in October — at 5 per cent. Higher inflation diminishes the real returns to the saver.