#dnaEdit: Deciding on a fair rate

Former Reserve Bank of India governor and former chairman of Prime Minister’s Economic Advisory Council C Rangarajan has set the proverbial cat among the pigeons when he pointed out in an interview with this paper on Monday that the almost unvarying interest rate offered on savings bank accounts — four per cent — smacks of cartelisation and that this could attract penalties from the Competition Commission of India (CCI). That is, the banks are violating the principle of fair competition. It is indeed a serious charge, and if there is any truth behind it then the banks involved in this should indeed be penalised. Either Rangarajan has definite information about cartelisation, or he is merely observing a trend like the economist that he is.

It seems that most household savings — it is more than 70 per cent of the total national savings — find their way into bank deposits despite the pitiable returns. Should the banks be encouraging greater savings  by offering the incentive of better interest rates on the deposits?Common sense suggests that that indeed is the way forward. Economists in general believe that India’s savings rate should be around 40 per cent if there is to be a double digit growth rate. Due to economic recession, savings rate has fallen to 30 per cent in 2013. So, there is a need to push the savings rate up.  

It is indeed a legitimate question to ask as to why the majority of banks, including the public sector majors, are keeping the deposit rates so minimal? If it turns out to be an unfair trade practice as indicated by Rangarajan, then there is need for action against the banks. As a matter of fact, a complaint should be filed in the CCI against the banks and they should be asked to explain the rationale of low deposit rates.

At the turn of the century, there was a decline in the savings rate but it was explained away by the experts saying that people were not parking their money in bank accounts but they were investing in the stock market, and making their money earn more than it would if it was kept in a savings bank account. If that indeed is the case, then there is all the more reason for the banks to offer attractive and competitive rates for the deposits.

Perhaps there is also a case to argue that the difference between the rate offered to the depositors and the lending rate of the banks should not be too large. If the banks are lending at around 12 per cent and more, then the minimum rate on deposits should be six per cent and more. But it would be argued that this would be ill-conceived intervention in what should be a free play of market forces. Money should fetch it can, both for the depositor and for the bank. Of course, banks have an advantage over the individual depositor because they can determine the rates. But there have to be ground rules which would not discriminate against the depositor who is on a weaker ground compared to the bank. In case, there is cartelisation, as suspected by Rangarajan, then there should be penalties. The charge of cartelisation has however to be proved beyond reasonable doubt, which
might be a difficult thing to do. It is for this reason that it may be necessary to decide on the ratio of difference between the deposit and lending rates.