SBI and the ditching of depositors

Savak Tarapore, the former deputy governor of the RBI, who stood out as a strong voice in support of common depositors, once encapsulated the sum and substance of financial sector reforms in two words: “customer service”. If that is the core of reforms, then the State Bank of India has just proved that it stands tall only in destroying all that the reforms agenda stood for.  In one fell swoop, the bank reduced the savings deposit rate by 50 basis points effective July 31, from 4 per cent to 3.5 per cent, for deposits up to Rs.1 crore.

SBI is India’s largest and oldest commercial bank with a customer base of over 42 crores (post the merger with what used to be its associate banks). Reports say almost 90 per cent of these customers, small, diffused and not organised, and the true power behind SBI’s financial muscle, will be impacted negatively. The change comes four months after SBI hiked its fees for a range of ordinary services and set out a complex structure that penalises savers with lower balances. In a country where many still work with low balances, where multinational FMCG companies and telecoms operators see value in selling by sachets, restrictions on the number of withdrawals, minimum balance requirements and curbing of ATM transactions sends a signal that the bank is no more in service of the vast majority of the people of India.

Worse, being the behemoth, it is, SBI has also signalled to other banks that this is a step they can get away with, and true to form, other State-controlled banks have already begun to follow suit. This is akin to cartelisation and draws immediate attention to a similar remark by the venerable Tarapore, when he argued that all banks offering a standard four per cent (soon after rates were deregulated) called for nothing short of an investigation by the Competition Commission of India. What we have unfolding before us today is the changing character of the nationalised banking system, and early signs of sharp practices that if left unchecked would land us in an ugly space of banks as sharks, preying on customers who will enjoy safeguards in theory but will have nowhere to go in practice.

What is the rationale behind the savings deposit rate reduction? What was the urgency to do so just before the announcement of the monetary policy decision by the RBI? When if ever will the reduction in savings deposit rates be passed on to the lending rate?

There is an erroneous view looming large in many fora (including the policy circle) that retail inflation is currently at a historical low (1.54 per cent in June) coupled with a fairly reasonable economic growth rate (7.3 per cent estimated for 2017-18). Going by the current inflation rate, the real interest rate (nominal interest rate minus inflation) looks positive at around 2 per cent (3.50 per cent savings rate; 1.54 per cent stated inflation rate). The depositor is not penalised therefore, it might be argued.

Nothing could be as misleading.  In the Monetary Policy Committee resolution (which came two days after the SBI shock), the inflation rate has been estimated at about four per cent in the baseline scenario.  Thus, there is a negative real interest rate for the depositor. The inflation expectation is at an even higher level, according to the RBI survey. Thus, the low level of inflation rate as a contributing factor for deposit rate reduction is not convincing. Moreover, it is a misleading half-truth.

One of the possible contributing factors for rate reduction is money destruction in the banking sector caused by demonetisation and subsequent remonetisation, leading to banks being flush with deposits, tempting a rate cut. The SBI has reported a multi-year high aggregate deposit rate growth of 18.14 per cent to Rs.20,44,751 crore “mainly due to the surge in savings bank accounts (which grew by 27.81%), following demonetisation”. This might tell us that demonetisation continues to take its toll on ordinary Indians, and this one will have a lasting impact on the pockets of the poor.

The SBI move on the eve of the MPC decision on the policy repo rate is an unethical action associated with moral hazard problems as it has the strong possibility of bearing on the decision of the MPC. It is appropriate if the government and RBI could prevail upon all the stakeholders in the financial sector not to take any policy decision on interest rates at least one week or ten days before the MPC resolution.

While defending the savings rate reduction, the Finance Minister has observed that there are higher interest rate savings rate (8 per cent plus) for senior citizens and pensioners. One has to understand that these schemes are fixed deposits with a tenor of three to five years. There is a penalty for premature withdrawal here.

It is true that we live in the era of deregulated interest rates. Some private and foreign banks do offer rates higher than 4 per cent but with higher minimum balance requirements and so are beyond the reach of poor and ordinary citizens. Protagonists of savings rate reduction and lower inflation should remember complacency develops soon in times that appear good and wrong decisions are taken. Most of the NPAs are a result of our best times during 2004-08. SBI’s NPAs itself are on the rise even now and were of the order of Rs.1.12 lakh crore as of March 31 this year. Can we blame the people of India for concluding that what the bank lost to the rich it is recovering now from the poor?

There is now an underlying interest rate arbitrage opportunity as well. The reverse repo rate of the RBI (overnight) is at 5.75 per cent. The bank could mobilise funds at 3.5 per cent and get 5.75 per cent at the RBI window. One may argue this could be a theoretical case and banks usually do not enter in such activities. But money is fungible and behaves like water. Furthermore, there are strong possibilities that disintermediation of savings may take place even by the common persons to wrong investments where there are promises of higher interest rate.

SBI has reduced the savings rate but has kept the marginal cost lending rate in the range 7.75 per cent to 8.15 per cent. This development shows that the organic relationship between the deposit rate and lending rate stands broken. This implies a clear profit-seeking move through higher interest margin. The latest SBI Annual Report was titled “An enduring value-creator”.  But its actions have shown it up as an enduring value-destroyer.

Jagdish Rattanani is Editor, SPJIMR. R K Pattnaik is Professor, SPJIMR

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