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Who is the real beneficiary?
The clamour for reduction in the lending rates of banks is growing despite the calculated benevolence shown by the Regulator recently by reducing the Repo rate. Banks are blamed for not passing on the benefit of the interest rates reduction.

In a highly competitive environment in which the banking sector is functioning, customer satisfaction assumes strategic importance in the growth of its top line as well as bottom line. A couple of banks are already feeling the pinch at present with their balance sheets drifting into red. It is rarely admitted by borrowers that banks operate with a thin margin and the innovative efforts adopted by them to reach out to the unreached, are bound to escalate their cost of operations. The quarterly financial reports of banks indicate the stress on their bottom lines. Surprisingly, one of the strongest among them has declared a loss in its latest quarterly financial report for the first time in its long history as an elite banking company.

Wide, varied customer base

Customer base of banks comprises of two groups; depositors and borrowers. Indian banking sector has one of the largest number of bank customers, measured in terms of the number of deposit accounts. There are 122.69 crore deposit accounts handled by the banks as on 31 March 2014. This number, however, does not reflect the actual number of depositors, despite the fuss made by banks in gathering the customers’ details under Know Your Customer process, when accounts are opened. As against this large number of deposit accounts, the number of borrowing accounts is very small - 13.87 crore. Small borrowing accounts of less than Rs.2 lakh, are 10.91 crore constituting 78.7 per cent of the total borrowing accounts.

Term deposit accounts are 20.06 crore in number. About 70.5 per cent of the term deposits are contributed by small deposits of less than Rs 100,000 per account. Though an accurate profile of the depositors of this group is not available, it is not difficult to visualise that majority of these depositors are senior citizens, pensioners, working women and also small enterprises which are required to maintain some amounts as deposits in banks.


Pleasing some to displease many?


If the banks have to ‘please’ the borrowers by reducing the lending rate, they have to ‘displease’ the depositors by offering lower rate of interest on deposits. The latter group is certainly larger in number. Banks have already reduced the interest rates on term deposits by 1 to 1.50 per cent. For small depositors, this directly makes a dent on their earnings from bank deposits.

Out of the total bank deposits, savings deposits constitute 26.5 per cent. By offering many frills to these account-holders, banks are trying hard to increase the deposits generated through this low cost deposits. Current deposit accounts, which form a part of the CASA deposits group, are not increasing as fast as they did before the mutual funds entered the financial scene. Incidentally, some of the banking companies themselves have promoted mutual funds.

The total assets under management of 41 mutual funds has grown steadily to reach the level of Rs.1,314,582 crore as on September 2015. During the quarter June to September 2015, the amount mobilised by mutual funds have increased by Rs.87,204 crore. As a conscious adoption of better funds management practices by many of the corporate giants, current account deposits are slowly declining. The flow of funds from large companies to mutual funds is imminent, reducing thereby the funds going to banks. In order to control the cost of funds raised, banks are compelled to reduce the rate of interest on fixed deposits.

Regulator’s stand

Since January 2015, the median base-lending rate of banks has declined by 60 bps. In the fifth bi-monthly Monetary Policy Statement of 2015-16 announced last month, it was reported that “Reserve Bank of India will shortly finalise the methodology for determining the base rate, based on the marginal cost of funds, which all banks will move to. The government is examining linking small savings interest rates to market interest rates. These moves should further help transmission of policy rates into lending rates.” The interest of the larger group of depositors should not be overlooked “while keeping the economy anchored to the path that should take inflation down to 5 per cent by March 2017.”

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