“Interest is a case of reward over financial matter; if you don’t mind it, it doesn’t matter !”
India’s annual budget is under preparation for approval by the parliament. Various interest groups pursue the Finance Ministry to redress demands for facilities, exemptions, concessions, and funding for projects that impact their healthy being. Senior citizens are also in the queue. They seek a hike in interest rates on deposits, their solitary source of survival during the prohibitively costly pandemic era.
With deposit rates heading south and the cost of living zooming north, senior citizens want the Government to ensure that they get at least 100-200 basis points higher interest rates on their deposits over and above banks’ prevailing card rate to make ends meet.
Senior citizens have long been sacrificing their share of the yield of interest on hard-earned savings of life for the nation’s development. They accept low-interest rates to enable banks to pass on the benefits to Corporates, Exporters, and MSME segments, by keeping the cost of borrowings artificially low. As per the RBI report, the weighted average domestic term deposit rates on outstanding rupee term deposits of scheduled commercial banks has come down by 3.72 % from 8.76 % in November 2013 to 5.04 % in November 2021. Due to modest interest paid on deposits, the loans to borrowers have moderated comfortably. But senior citizens have suffered silently.
This cross-subsidization is morally acceptable if the funds provide genuine utilization for productivity enhancement and employment generation. With the financial assets of banks collapsing by the hour clock, mainly due to the greed and diversion of funds by aspirational people in business dreaming overnight enrichment, the gambit needs a fresh look. The legal system looking tirelessly helpless to bring sanity to the ongoing loot, the Reserve Bank of India has to redeem itself as a regulator of interests of each stakeholder in the financial ambiance.
With over ten lacs crores of funds of banks locked up in the vice grip of NPAs, the demand for ending the honeymoon of cheaper funds to businesses with inadequate integrity stands justified. The time to offer differential interest rates to the Senior Citizens has arrived and needs to be addressed by the authors of the Union Budget.
The theory of evolution of “Interest” also justifies the elders’ claims. According to historian Paul Johnson, “food money” was frequently lent in various civilizations since 5000 BC. Since the acquired seeds and animals could reproduce themselves, the argument accepted to justify interest.
The charging of compound interest dates roughly 2400 BC. The annual interest rate was around 21%. High interest was necessary for the development of agriculture and essential for urbanization. In the medieval economy, people availed of loans due to necessities like bad harvests or fire in a workplace. Under such extreme conditions, it was morally reproachable to charge interest.
In the Renaissance period, distances shrunk due to greater mobility of people facilitating enhanced commercial activity and the emergence of the opportunities appearance of appropriate conditions for entrepreneurs to start new, lucrative businesses. Since borrowed money was no longer strictly for consumption but for production, people no longer viewed charging interest in low esteem.
The Banque de France attempted to control interest rates by manipulating the money supply in 1847.
In Banking, the rate of interest is the cost of capital. In a free-market economy, interest rates are subject to the law of supply and demand of the money supply. Interest is payment from a debtor or bank to a lender or depositor of an amount above the amount borrowed at a special rate. It is different from a fee which the borrower may pay the lender. It is also separate from a dividend paid by a company to its shareholder owners from profits or reserve, but not at a particular rate decided beforehand, instead of as a share in the reward gained by risk-taking entrepreneurs when the revenue earned exceeds the total costs.
Interest differs from profit. Interest is a monetary gain to a lender, whereas profit goes to the owner of an asset, investment, or enterprise. The interest rate, expressed in percentage, equals the interest paid or received over a given period divided by the loan amount lent or borrowed.
As the hard-earned money of Senior Citizens continues to be is lent at the fall of the hat to all and sundry, who are enriched manifold, the RBI can not ignore the demand to compensate elders with adequate returns anymore.
For offering higher deposit rates, the Government could incentivize Banks by either giving them tax concession or lowering the deposit insurance premium they pay on senior citizens term deposits, say experts. Banks should pay higher differential interest on deposits to senior citizens and stop cross-subsidizing the borrowers.
Rightly said, “In the end, it’s not the total deposits in your Bank account that count. It’s the monthly interest you get in your account.”
About the author
Mr. Hargovind Sachdev is an Ex-Banker, GM(Retd) of State Bank of India. Has over 39 years of experience in banking, having occupied senior positions in UCO Bank, United Bank of India, State Bank of Patiala, State Bank of Travancore & State Bank of India where he headed the Central European Credit Desk at Frankfurt, Germany from 2006 to 2011 covering 15 countries of Central Europe. Has undergone International Banking Training from Asian Institute of Management, Manila, the Philippines in the Year 2003 and a Multi-currency lending-technique training at the Euro Money Institute, London in 2009.
He has specialisation in Credit, Foreign Exchange, Vigilance, Monitoring & appraisal of Corporate Loans, MSME Credit, Gold Loans, Agricultural Loans & NRI Business Management in assets & liabilities. As a Forensic Auditor, he has conducted various Transaction Audits allotted by Banks.
He was felicitated by the Central Vigilance Commissioner, Sh. C.V Chowdhry for winning first prize for best article on Preventive Vigilance in 2015. He is also an accomplished Public Speaker having conducted multiple Motivational Seminars for institutions like ONGC, National Housing Bank & Bank of Baroda. He is an Inde-pendent Director & consultant to various big entities in corporate sector at present.
