AN APPEAL TO PRIME MINISTER INCREASE INTEREST ON DEPOSIT RATES FOR SENIOR CITIZENS

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AN APPEAL TO PRIME MINISTER

INCREASE INTEREST ON DEPOSIT RATES FOR SENIOR CITIZENS

 

India is not a welfare state. Many senior citizens do not get pension. The terminal benefits they get upon retirement from job are put in bank fixed deposits. So, they depend on the interest on deposits for their upkeep.

“Public sector banks should balance the need for reporting higher profits with the social responsibility of taking care of the interests of senior citizens.”

In the absence of a workable social safety net, the interest earnings from accumulated savings serve as the only available means to protect the real income of senior citizens other than those receiving inflation-indexed monthly pensions. The across-the-board reduction in interest rates, even when justified in the interest of more efficient monetary policy transmission, may go against the objective of income stabilisation for the retirees

Let's first understand the problem so we can better grasp why the decision to reduce interest rates in  banks is a bad decision.

Banks create money in an economy through the issuance of credit using a process called fractional-reserve banking. This is how it works: Say you deposit Rs 100 in your bank. The bank is required to hold only a small portion of the deposits as reserves and can loan out the rest. If the reserve requirement is 10 per cent, the bank can loan out 90 per cent of the deposit or Rs 90 in this case. The borrower then further deposits Rs 90 in her bank which too can now loan 90 per cent against this deposit or Rs 81, to another borrower. The Rs 81 deposited again creates another loan of Rs 72.9, and the cycle goes on.

So, with fractional-reserve banking, a single deposit of Rs 100 can create loans worth Rs 1000 (100 divided by 10 per cent). This process is hugely profitable for banks because they make interest on money created virtually out of thin air. In India, the reserve requirement is 5.75 per cent, so a Rs 100 deposit eventually becomes credit ( or new money) worth Rs 1,740 ( 100 divided by 5.75 per cent).

But like every other Ponzi scheme, this process works fine until some loans start defaulting. And this is what is currently happening in India. Almost 11 per cent of all loans outstanding are non-payable loans (NPLs). In other words, the borrowers cannot repay the principal or interest on these loans.

The money loaned by the bank is an asset on its balance sheet and when a loan turns bad the bank’s assets are reduced, which correspondingly also reduces the bank’s equity capital by the same amount. As a result, banks find themselves needing additional funds to meet their capital adequacy requirements.

But a public sector bank does not face this problem here  because it has access to public money which the government can inject directly, or it can avail of the government’s ability to raise capital by issuing bonds. The Indian government’s recapitalisation plan uses both Rs 18,000 crore of taxpayer money infused directly and Rs 1,35,000 crore raised by issuing bonds on which current taxpayers will pay interest, and future taxpayers will be stuck with repaying the principal amount on the bond. Then why can’t they rise interest to at least senior citizens to 10%  who would constitute a small portion of depositors and follow merciless steps on recovery of Npl and   and grant fresh loans with the savings as explained above

 



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