The Hindu Business Line : Save short and borrow long

"As my card spend has soared from a couple of hundred rupees a month to couple of thousands, I need to maintain a fatter balance in my savings bank account these days," Mr Abraham Mathew, manager with a public sector undertaking in Kochi, said.

With ATM cards replacing the traditional passbook, banks have made a higher cash balance mandatory. But these are not the only reasons why the Indian middle-class have begun to save and spend more through their savings bank accounts.

Says Mr Abraham Kallivayalil, practising chartered accountant: "The Indian consumer is learning to borrow to spend. The habit of making big-ticket borrowings to finance your house, car or expensive household gadgets is no longer restricted to the urban centres, but has percolated deep into the rural segment as well. With the monthly billing system coming into vogue, the individual consumer has learnt to retain more in his savings account. Thus, the balance in the savings bank account has continued to grow."

As a result, an average balance of Rs 10,000 in the savings bank account is increasingly becoming the norm rather than the exception, among the urban households.

Thus, while the savings bank balance has grown stridently, the fixed deposits have not been able to keep pace. The longer you keep your money in the bank, the lesser you get in incremental interest. Ever since the emergence of the low interest rate regime, this seems have become the trend in the banking industry.

As the returns on savings bank deposits have blinked just marginally with the introduction of the low interest regime, the returns on long-term fixed deposits have plummeted. Small wonder that while savings deposits are headed north, term deposits seem headed in the other direction.

During the last three years, the returns on savings bank deposits have fallen by just half a percentage point from 4 to 3.5 per cent, while the rates on long-term term deposits with a tenure of three years and above have plunged by about four per cent from 10 per cent to 6 per cent.

"I no longer finder it attractive to retain my savings in long-term fixed deposits with banks. I would rather park them either in short-term or in savings account, which offer good returns and very high liquidity," Mr Kallivayalil says.

Mr K.P. Padmakumar, Chairman of Federal Bank, concedes that there has been a run from long-term bank deposits to either short-term or savings bank deposits. But the flavour of the season seems to be the post office savings, which offer lucrative returns of 8 per cent and up to 9 per cent for senior citizens. And increasingly, the bank customers have begun to borrow long and save short with banks, while parking their long-term savings in post offices.