Finance minister Arun Jaitley on Saturday partly blamed high
returns on savings deposits as a key reason behind costly bank borrowing that
is hurting private investment and growth in the broader economy.
While the government
has kept interest rates unchanged on state-run small savings for the
July-September quarter, Jaitley’s comments can be seen as a signal for banks to
reduce lending rates, even if these came at the cost of marginally lower
returns on savings and fixed deposits.
Businesses have been
pushing for banks to lower loan rates, reduce capital raising costs and aid
capacity additions.
“Whether domestic savings are only to be used by such instruments which give you a higher return and create an interest regime which is extremely costly and makes the economy sluggish, or higher returns are to be got from such instruments as funds, bonds, shares (that finance projects and economic activity),”
“A lot of them have
also an element of secured investment in them which can give people a very
respectable return itself,” the finance minister said, arguing in favour of
parking money in non-bank savings options such as pension funds.
“That’s the basis on
which pension funds the world over have been functioning and I think these are
areas of advances as we grow over the next several years and decades. More and
more opportunities are going to come to us,” he said.
Jaitley was speaking
at a function to unveil a commemorative postage stamp to mark 140 years of the
Bombay Stock Exchange (BSE).
In April, India
moved to a market-lined system of state-administered savings rates, announcing
sharp cuts in interest earned on a range of government-run schemes including
the popular public provident fund (PPF). Market rates move in tandem with
government bond rates that are currently on a downward trend.
Should banks lower
returns on savings and fixed deposits, the move could allow banks to pass on
policy rate cuts by the central bank through lower lending rates.
Jaitley said the
Indian economy will need a lot of investment for a reasonably long period to
bridge the infrastructure and industrialisation deficit that has existed for
decades.
Banks often point
out that they are forced to offer high interest rates to customers to make it
more attractive for people to park extra funds with them in fixed deposits
ahead of post-office and other state-run savings schemes.
Banks, however, do
not seem have fully passed on the benefits of lower returns on state-run
schemes and successive cuts in Reserve Bank of India (RBI) rates.
While the RBI has
cut the key policy rate by 1.5 percentage since January 2015, banks have passed
on the benefit to borrowers by lowering lending rates by less than a percentage
point.
Experts said the
finance minister was keen that benefits of market-linked systems follow through
to borrowers at a faster clip.
“Jaitley is hinting
at the need of having an overall liberalized interest rate regime in the
country, which will reduce the cost of funds,” DK Joshi, chief economist at
Crisil, a credit rating and research firm, said.
“This would require
small savings rate to be completely aligned to market rates to get rid of
rigidities in interest rate structure,” Joshi said.
Source: ht
