PS BANKS AGENDA : MAKE RICHER MORE RICHER, ENSURE POOR REMAINS POOR

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PS BANKS AGENDA : MAKE RICHER MORE RICHER, ENSURE POOR REMAINS POOR - Are GOI and RBI Listening ?

Rajesh Goyal, Executive Consultant, AllBankingSolutions.com

I was thinking of reviewing the market response to RBI's bold decision of de-regulating SB interest rates only towards he end of the month so that PS Banks have been given sufficient time to make up their mind. However, SBI's eye-catching advertisement on 21st November, 2011, and an email received from one of our regular reader, Mr. M Perumal, from Chennai, forced us to review the same immediately.

RBI had lighted its well kept secret bomb just a day before Diwali (i.e. on 25th October, 2011) by deregulating SB interest rates. Although this made the headlines next day, but its implications were not discussed in the public domain properly. CMDs of PS banks in their interviews in the following days, gave casual replies and were not ready to take the first call. It appears a hidden cartel of bigger banks, specially the PS banks, is working and wants to ignore even this guidance by RBI that SB rates needs to be market related. PS Banks had successfully done this, in case of at least last two hike in Repo Rates, when they refused to revise their base rates or BPLR rates.

A review of the last four weeks has indicated :-

Four private banks have increased SB rate of interest from 4.00% to 5.50% and 6.00%;
CMDs of most of the PS Banks have issued statements that there is no need to increase SB interest rates immediately and they will watch the market. This means they were neither ready to take the lead nor were ready to realise the ground market conditions. No body wants to take lead to align the rates according to market conditions.
PS Banks maintained at the beginning of the month that they are flush with liquidity and thus they are under no pressure to increase rate of interest of either SB or FDs.

We give below some of the recent views expressed by CMDs of major banks like SBI and PNB. The recent policy decisions by top PS banks clearly indicates that they are trying to go against the market trend to protect their bottom lines. Our Finance Minister, Planning Commission babus and political class has always insisted that PS Banks are pro-poor and thus can not be privatized. I will like our Finance Minister, RBI top officials to take a review whether the following recent policy decisions are pro-poor or anti-poor and anti-middle class:-

Retail Fixed Deposit rates have not been upwardly revised since August, 2001, and the returns at present on FDs are below the 10 year YTM and are far below the inflation. Some of the banks have even reduced the retail deposit rates during last two months. though the rates on small savings have been revised recently by GOI. This is surely anti-poor, anti-senior citizen policy as the returns on bank deposits has become negative.

Inspite of last two hikes by RBI for Repo rates, no major Bank has thought it fit to increase either the Base Rate or BPLR rate. They have conveniently ignored the guidance of RBI in this regard. One of the CMDs of major bank has even taken a shelter that it will lead to increase of interest rates for retail loans like auto loans and housing loans. The retail loans form only 30% of the total advances, and could have easily been kept out of the hike if banks are so much concerned for upper middle classes. The avoidance by PS banks to realign the interest rates for the corporate sector is a clear indication that they are protecting the Rich class.

The SB interest rates have been increased by only four private banks which have major presence only in urban and semi-urban areas. The PS banks are well aware that poor people in rural area have no option but to keep their savings with PS banks. Similarly, the poor urban class is also afraid of going to private sector banks as an image of these banks have been created as if their service charges are very high. Thus now private sector banks like Yes Bank are paying 50% more rate of interest then the PS Banks. This is an open loot of the poor (specially the rural poor) who are forced to keep their funds in SB accounts at a rate much lower than the market rate. PS banks will be now cross subsiding the poor and rich, by LOOTING THE POOR IN RURAL AREAS by offering them lower rate of interest on huge saving bank deposits and then offering the CORPORATE WORLD LOANS AT A LOWER RATE OF INTEREST. PS Banks are banking on the loyal customers of rural India who have no option but to stick with these PS banks.

Now SBI has come out with a new scheme "un-Fixed" scheme for rich people who can deposit Rs. 1 crore and above, will be paid 8.5% pa for any period between 7 days and 180 days. Moreover, there will be no penalty for pre-mature withdrawals. (For poor and middle class people the rate offered is between 7.00% and 7.25% pa). Thus, the retail depositors who will never have Rs. 1crore are offered about 1.50% less than their RICH counterparts. This is a loot of poor people who are already hard pressed by inflation.

All the above clearly shows that PS Banks are clearly not PRO-POOR, BUT ARE TRYING TO SQUEEZE THE POOR TO MAXIMUM EXTENT BY OFFERING them lower interests rate on SB accounts as well as FD accounts when compared with the RICH people. Moreover, these banks offer CORPORATE BORROWERS LOWEST RATE OF INTEREST (at base rate or near the base rate) ON LOANS RAISED FROM PS BANKS and when in trouble they are given the best re-structuring packages, like we will soon see in case of KINGFISHER.

GOI, RBI and PS Banks should now stop professing that they are Pro Poor as they have now been fully exposed. PS banks are in no hurry to raise the SB interest rates as it will expose the bottom lines and NIM which are undoubtedly very high for a country like India.

The short-sightedness of the top management of these banks has been exposed once again. CMDs of PS Banks, who were issuing statements in the first week of November, 2011, that PS banks are surplus liquidity and they need not increase interest rates on deposits, have suddenly found that liquidity has disappeared. On 21st November, the call money rates have touched 8.75% i.e. above the Repo rates. Banks borrowed Rs 1.27 trillion from the central bank's liquidity adjustment facility window on Monday (21st November), compared with 1.07 trillion rupees on Friday, both well above Rs 495.25 billion at the end of the first week of November.

PS Banks needs to understand the market trends and if ignored any longer will result in permanent shifting of SB funds at least in cities. Once such customers have tasted good customer service at these private sector banks, they will never return back to PS banks even if the interest rates are revised upwards. PS banks needs to act before it is too late.

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What Are the Views of Top Men of PS Banks :

On 9th November, 2011 SBI CMD Pratip Chaudhuri, was quoted as saying "There is not much adverse movement in the savings bank (SB) balances in the last one month. As of now, we have no plans to tinker with the SB interest rates," Chaudhuri also said those banks which have raised savings deposit rates lack reach. He also maintained that the public sector lender is also in the process of shedding its bulk deposit portfolio in order to maintain the margin. (IBN Live)

Similarly, the reports on 3rd November, 2011also indicated that Indian Overseas Bank too said that while it is certain that interest rates on SB accounts will go up, it would however wait for some time before taking a call. Similarly, the Punjab National Bank said it would take a view after seeing market trends.

The reports dated 5th November, 2011 indicated that bigger banks, both government-owned and private banks, are not in a big hurry to hike interest offered on savings bank accounts post deregulation of rates by the Reserve Bank of India (RBI). �We are watching the market. We are not in a hurry to take any decision,� said KR Kamath, CMD, Punjab National Bank. Banks have chosen to wait and watch how this change affects the banking sector and if customers shift base to banks offering higher interest