Banks rake in profits at the cost of depositors profits worth Rs 4111 cr from depositors

Indian banks are raking undue profits worth Rs 4111 crore annually at the cost of their depositors parking funds in their savings bank accounts.

Profits are made by the banks, in fact, even without the knowledge of their savings bank account holders. It is a surprising, but a fact, that most banks do not pay any interest on a large chunk funds lying with them in the savings accounts.

Currently, the stated rate is 3.5 percent per annum. Owing to archaic interest computation principles and banks refusal to change over, the effective interest rate paid on savings bank deposits is a miniscule 2.8 percent.

It works like this: Banks pay interest on minimum balance lying in a savings account between 10th and end of the month.

If a customer deposits, say Rs 1000 into his savings account on July 11 and withdraws on August 31, he will not entitled to any interest from his bank despite the fact that the funds were lying with the bank for 51 days.

On the other-hand, if the customer puts in Rs 1000 on say April 10 and withdraws the same by the month end, i.e. 19 days, he or she may earn higher interest.

But, the data with RBI has shown that most banks continue to follow archaic interest computation methods thereby denying their customers the actual interest payable on savings bank deposits.

RBI Bulletin of March 2007 has reported that the banks have with them a humungous Rs 587,217 crore in the savings bank deposits during December 2005 – November 2006. Banks have made a moolah on the interest unpaid to its customers on these funds.

Banking Codes and Standards Board of India (BCSBI) Chairperson Kishori J.Udeshi has pointed to the ripping of consumers by banks across the country in an internal note. Uddeshi questioned, “In these days of electronic wizardry, is it necessary to continue to follow this methodology for the ease and convenience of banks at the cost of the depositors?”

The rip off constitutes a massive chunk of banks’ profits. During 2005-06, the scheduled commercial banks reported Rs 24,592 crore as net profits.

Another issue is why should the banks pay interest on the minimum balance and not the maximum? This again seems to be a case of high-handedness of banks against their vulnerable customers.

As per RBI norms, the banks charge highest interest rate on even a day’s overdraft availed by a customer. The contradiction seems to be bogging the bankers seeking to bring in ‘customer friendly ethics’ into Indian banking industry.

Dr Ashish Das, a Visiting Professor at the University of Akron, in his latest study has recommended switchover to computation of interest on savings bank deposits based on daily balances thereby allowing the customer to get the complete benefit of annual interest rate fixed by RBI.

In his study, Dr Ashish Das has also pointed out that the banks will have to put a stop to quarterly crediting of interest computed on monthly basis by banks. Most banks are taking longer to pay the interest amount to their customers which he is entitled to.

However, the Indian Banks Association (IBA) is not very comfortable with these suggestions. In fact, most banks have opposed the switchover citing the huge costs. Moreover, the banks are not willing to surrender a chunk of their profits in favour of their customers.

Further, there seems to be a case for hiking the nominal interest paid on savings deposits to 4 percent from prevailing 3.5 percent. Another alternative being floating serious bankers is the possibility of partial deregulation in the floor rates applicable to balances in savings bank accounts.

The recommendation of a section of banking establishment is that a lower ceiling be put on interest rate payable by banks to its customers on savings bank deposits.

Hike in interest rates and providing flexibility on savings bank interest rates has been hanging fire during last five years. Taking into consideration the then prevailing interest rate scenario, incumbent RBI Governor Dr Bimal Jalan reduced the rate by 0.5 percent to 3.5 percent in the Monetary and Credit policy presented on April 29, 2002.

From then on, there has been no change in the rate thereby allowing the banks to rake in undue profits on savings bank accounts deposits in last five years.

Current RBI Governor Dr Yaga Venugopal Reddy has resisted the move to restore the 4 percent interest rate on savings deposits in the monetary policy of 2006-07 owing to pressure from IBA.

According to sources, aggressive private and public sector bankers who are eager to show healthy balance sheets have already commenced lobbying against any revision even this time round. Dr Reddy is likely to take a view in the scheduled monetary policy review scheduled for April 24, i.e. ten days from now.

Trend analysis on interest rates applicable to savings bank deposits vis-à-vis prime lending rate, cash reserve ratio, repo and reverse repo rates and term deposit rates has shown that there is a case for revision this time round.