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Saturday, Oct 19, 2002

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Columns - On Mint Street

Unfair deal for the ordinary investor

P. Devarajan

BANKERS are betting on a 50 percentage point drop in the bank rate from 6.50 per cent on October 29.

A clue is available in Bank of Baroda and Canara Bank dropping deposit rates further to cut on the lag time if and when RBI drops the bank rate.

A bank benefits from a cut in deposit rates on future and not on past liabilities. By advancing the timing, the banks seem to be sure of RBI's mind.

On credit policy day, they will oblige with a marginal drop in PLR (if that's relevant anymore) and maintain extant spreads. A 15-45 days' deposit with Canara Bank today earns 4.25 per cent, while a saving bank account earns 4.50 per cent. But as saving deposit rate is applicable only on month-end deposits, no saver really earns much.

In other words, banks are fully and unfairly booting the ordinary depositor who has nowhere to go as every other place reeks of scams despite numerous regulators and an omniscient Finance Ministry. The worst hit are the aged and the pensioners earning less and less on bank savings with no social insurance to talk off.

RBI can console them by reading out the Dr. Reddy committee report which was keen on linking interest rates on contractual savings to market movements. Till today there is no RBI committee on the price of money lent as advances by banks and the consequent profit margins.

RBI could then help the Finance Ministry prune interest rates on Relief Bonds (I and II) though that could happen at the end of the current year.

In its April 29, 2002 credit policy, the RBI had said: "In case the overall liquidity and credit situation warrants, and inflation rate continues to remain low, a reduction in the bank rate by up to half a percentage point (50 basis points) will be considered by RBI as and when necessary."

With oil prices taken out to measure core inflation, the RBI and the Government could well talk of a low inflation rate. Some critics are upset over a low inflation regime though it could be effective provided investments start picking up.

In fact, some bankers predict an upward movement in interest rates by March 2003, if not earlier, on the back of a pick-up in economic growth. Before that happens, the RBI Governor needs to pull up bankers over an unkept word when he presents them with the busy season credit policy. Banks are refusing to part with information on spreads, which the RBI insists falls in public domain. Though it has been made mandatory, the flow of information on spreads from banks to Mint Street is thin. The excuse: It's difficult to compute the information.

If that be so, then RBI should look into each bank whether they have proper ALM and risk management systems in place.

On April 29, the RBI had said, "Banks should also announce the maximum spread over PLR to the public along with the announcement of their PLR. The RBI will review the matter again in October 2002 after further consultations with select banks with very high spreads over PLR."

Banks are thwarting a cheap money policy from working and RBI needs to hit them hard with punitive fines.

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