Banks sure to make profits as Interest rates on Deposits plummet

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The one-year Fixed deposit rate in SBI is 5.10% per annum, ICICI bank 5.50%, HDFC bank 5.60%, Kotak bank 5.25% and in all most all PSBs like PNB, Canara Bank, Union Bank it is 5.50% per annum as per information available today.

The main reason is that RBI reduced Repo rate for loans from RBI and Reverse Repo rates for deposit with RBI drastically during the last 15 months to as low as 4%.

Let us see the scenario in 2014 when the Modi government assumed power. The interest rate for deposits of one year period ranged between 8% to 9%. People used to save mostly in Banks. Of course, the inflation rate was also above 9% officially from 2011 to 2014.

That means the interest rate on deposit of above one year was swallowed by an increase in the inflation rate. Virtually interest rate is zero in practical terms. So black money in circulation was heavy from 2011 to 2014. Then the Government had not put any restriction on the money circulation. Even if Rs.200 lakh paid in cash for the purchase of land or flat, there were no restrictions in registration only PAN card copy to be produced. Even after submitting PAN copy, there were no enquiries for payment of Rs.200 lakh in cash from the Income Tax department. So it was going on rudderless.

The NDA government since May 2014 started reducing the RBI rates to bring down the deposit rates in banks. It is believed that interest rates reduction in banks will have the same effect in the private market also. The private market rates were 18% p.a minimum to 30% p.a maximum from 2011 to 2014.

But the situation changed after the announcement of Demonetization on November 8, 2016. All salaries above Rs.10,000 to be paid by account transfer only with exception to cleaning staff only. All land, flat or house registration documents shall declare how the money was paid to the seller. No cash to be paid for registration transactions.

The bank deposits have gone with depositing of old 500 and 1000 rupee notes. Hence, interest rates were slashed by 0.5% to 1.00% by all banks. Last year in March 2019 to March 2020 to control inflation, interest rates were curtailed by RBI several times. For example, the housing loan interest rate was around 9% p.a to 10.00% p.a in 2014 May, now it was 7% to 7.5%. That means RBI s reduction in Reverse Repo rate was not passed on to the customer by the banks. It should have been 5.5% to 6.00% per annum only for housing loans and car loans had RBI policy was followed.

Banks are not reducing interest rates on loans drastically as done by RBI, to cover the huge losses occurred due to big NPA accounts amounting to 10% of advances, which will not fetch any interest income or renewal charges to banks from the date of NPA.

The loss occurred in big corporate loan accounts sanctioned without security was covered in the remaining 90% of the loans.

For example, SBI, HDFC Bank and ICICI bank have CASA (current account and Savings bank account) have more than 40%. So far this year, the average cost of all deposits will be 4% only.

In such a case, Housing loan at 6% p.a is also a profitable loan with 2% interest margin. But it is not so. Canara Bank declared 7.85% p.a for gold loans is a good move compared to 12% p.a in private companies.

Banks merger also put credit growth a lot of problems, even for existing customers. No executive knows where he will be posted after 3 or 6 months (transfers due to merger) so many loans were not sanctioned in merged banks (10 banks to become 4 banks) during the last 6 months.

Options for Pensioners

Pensioners depending mostly on interest earned on their hard-earned superannuation money only. As deposit rates have fallen to 5.1% to 5.50% only per annum, their monthly income ought to have plummeted. This has caused several difficulties for them with not just the reduction of interest rate but also increasing prices of essential commodities and medicines on the other side.

Some people are investigating in Mutual Funds, but I advise against such move as Mutual funds are also suffering. Some are investing in private company deposits at 8% to 9% p.a. which has only 50% security. Only finance companies of Tata, Birla, Bajaj etc are attracting investment in deposits at 8% or 9% p.a.

Unless inflation is controlled, the deposit interest rate may fall to the American level of 3% p.a. for three years FD. How the middle class and pensioners would react to the falling interest rates of deposits to be seen.

One thing is sure and Written On The Wall that All Banks in India will post a huge profit this financial year.