LOW INTEREST REGIME

Robbing The Poor Peter To Pay The Rich Paul

 K V George

AS the bank employees and officers across the length and breadth of the country, cutting across organisational barriers, observed the 34th anniversary of bank nationalisation that took place on July 19, 1969, it was indeed promising that the performance of public sector banks (PSBs) seemed to be at its best. That was the indication given by the working results so far released --- as on March 31, 2003. Significantly, even the so-called ‘weak banks’ have come out in flying colours. Analysts enlist, inter alia, the following prime factors for the higher profits registered by the PSBs.

1) Increasing spread, born out of an administered low interest regime.

2) High treasury profits booked by the sale of a portion of the high yielding investment in guilts.

3) Incidence of technology upgradation.

4) Low operating costs, particularly on labour, on account of implementation of the ‘voluntary’ retirement scheme (VRS) among other things.

5) Potential for high recovery of the non-performing assets (NPAs), in the light of the Securitisation Act.

Let us analyse the socio-economic implications of a low interest regime in the context of the goals set out by the architects of bank nationalisation.

SHIFT IN CONCERN TOWARDS PROFITS

Banks essentially deal with the savings of the community. With the advent of nationalisation, the PSBs opened branches in the villages, most of whom were then uncovered. People were urged to save a portion of their earnings. The depositors, mostly households, were offered reasonable and remunerative rates of interest (ROIs). The savings so mobilised were deployed for the genuine economic activities of the needy citizens at affordable ROIs. It was an era when local moneylenders were exploiting the people by charging exorbitant rates after securitising all their valuables --- lands, houses, ornaments, utensils, agricultural produce and the like. The 1969 nationalisation of 14 banks was intended, among other things, to liberate the rural masses from the clutches of local moneylenders. This goal has been achieved substantially, though not fully, in the three post-nationalisation decades, either through the various schemes sponsored by the government or otherwise. The operations of the banks reflected a degree of concern for the people, beyond commercial considerations.

But once the financial sector ‘reforms’ were set in motion, the lofty goals were given a go by. The emphasis was shifted towards profits, to the detriment of everything else. Anything that earned some profit was justifiable. Understandably, the PSBs began to run after the low cost deposits (LCDs) and the spread (that is, the difference between the ROI offered and the ROI charged). Banks began to offer low ROIs to the depositors and charging maximum from the borrowers, of course selectively, with a natural bias against the voiceless, poorer household depositors. Successive monetary and credit policy pronouncements of the Reserve Bank of India (RBI) served as a tool to implement this hidden agenda.

The RBI has systematically reduced the bank rate (BR) from 11 to 6 per cent in five years, that is, by 500 basic points. With effect from April 29, 2003, the BR has been reduced from 6,25 to 6 per cent. This is the sharpest reduction in the BR since independence. Likewise, the cash reserve ratio (CRR) has been gradually reduced from 11 per cent in August 1998 to 4.5 per cent as on June 14, 2003. The CRR has been reduced by 4 percentage points in 3 years.

FAULTY PRICE INDEX  

RBI governor Bimal Jalan sought to justify a low interest regime in the name of curbing a high cost economy. He also harped on the plea of the prevailing low rate of inflation. But the fanciful official price index, coupled with the rate of inflation compiled on its basis, is found to be quite misleading and mostly manipulated, and it does not truly reflect the real price line that is being witnessed in the entire country. One important fact is that the service sector that accounts for 55 per cent of the gross domestic product (GDP), is not reckoned in compilation of the wholesale price index (WPI). There are other factors too --- like the faulty selection of the commodity basket and wrong allocation of weightages --- that give one ground to suspect the validity of the price index. Despite all manipulation, however, the rate of growth of inflation did touch the 6.24 per cent mark in April 2003, when the market theologists in the RBI chose to shun it as an aberration.

A reference is often made to the declining ROI all over the world, especially in the industrialised economies, where the savings of the business corporates are substantially higher. In India, in contrast, it is the households that account for a majority of the savings; these are estimated to be 69.2 per cent of the total deposits. The contribution of the private corporates is only 3.6 per cent in our country. Evidently, a mechanical comparison with the West is hardly convincing in the Indian context.   

The provident funds (PF) deducted from the wages of workers are a sort of compulsory savings. The reduction in the ROI has also been extended to the PF deposits as well as the small savings schemes. But the regulators are certainly wrong if they hold that the PF, pension funds and other long period savings are to be judged strictly by economic and commercial parameters alone. Schemes such as these have social security implications.

SUBSIDISING THE RICH

For the year 2002-03, the PSBs as a class could, reportedly, reap the benefit of a lower ROI and the increasing spread. It is estimated that the spread of the PSBs hovers between 5 and 6 per cent. Banks are targeting and soliciting more and more of low cost deposits (LCDs), savings bank and current accounts, compared to term deposits. The LCDs vary from 25 to 35 per cent in the PSBs. This, in practice, amounts to misguiding the poor customers to close their term deposits and open, in their stead, current or savings bank accounts; this is both unethical and criminal. As a result, the savings of the common man are earning less and less. Peasants, workers and the retired persons are the worst hit.

On the advances side, credit facilities to the rural and agricultural sector or the small scale industries attract ROIs above the prime lending rate (PLR). This is also the case with the much trumpeted retail lending --- housing loans, educational loans, vehicle loans and loans for other consumer durables. Aggressive marketing of credit cards constitutes the most lucrative business for banks. Liberal cash withdrawal facility is permitted to the middle class, but at an ROI that is thrice above the PLR. The middle class, that considers the credit cards as a vanity symbol, is being subjected to “the unkindest cut of all” by the profit crazy banks. Perhaps even the local moneylenders do not nowadays charge so prohibitive a rate of interest.

But the real beneficiaries of the cheap credit policy are the Indian corporates who are, even otherwise, advantageously placed. They are in a position to negotiate and dictate the ROI in their favour. While the bank employees are required to pay an ROI that is at or above the PLR, the corporates are privileged to avail of hundreds of crores of rupees as credit facilities at below-PLR rates --- at 7 to 8 per cent on an average. With the availability of so amazingly cheap bank credits, the corporate promoters have of late increased their equity so that nobody could take their companies over: the TISCO, Grasim, Hindalco and Reliance are among the classic examples. Ironically, these white collar criminals --- who have already defaulted on the repayment of huge bank loans ---have managed to buy back their own equities with the cheaper bank credits from the PSBs. It would not be surprising if these credits are not repaid but get added to the non-performing assets, as has hitherto been the case.

Evidently, if the households are the savers, corporates are indeed the main borrowers. The cheap credit policy of the RBI is, in fact, facilitating an indirect transfer of the resources of the community from the have-nots to the haves. It amounts to mobilising cheap deposits from the ordinary citizens and lending the same to the industrialist class at subsidised rates.

PROMOTING EQUITY CULT

This softening of the ROI harbours another ‘reform’ agenda --- of developing the capital market at the cost of other segments of the financial sector. It is a conscious effort to promote the equity cult and divert the bank savings to the Dalal Street. But today the same capital market has become the breeding ground for financial scams and scandals. It is mainly because of these that the mutual fund industry, including the once giant UTI, has virtually collapsed. Even otherwise, the ordinary Indian household savers are afraid of the bears and bulls of the capital market because of the complexities involved in the latter. Bimal Jalan and other policy makers seem to have (deliberately!?) ignored this element.

The fact of the fact is that the theory of low interest regime would have been much more convincing if only it had helped achieve a sustainable and visible economic or industrial recovery in any way. But official statistics reveal the story of poor takeoff of industrial advances since 1995. Banks are ultimately forced to invest the bulk of their loanable surplus in government securities. This is the phenomenon that is referred to as credit paradox, which is unproductive and unhealthy. According to S S Tarapore, former deputy governor of the RBI, making the ROIs too attractive and credit too easy is the sure path to disaster. This is what has made the Indian entrepreneurs habituated to unsustainably large borrowings, while deploying only a minimum of self-generated and self-owned funds.

To conclude, this softening of the ROI, that has been tutored by the international pro-imperialist financial agencies, is most unpalatable to the Indian socio-economic realities. For one thing, it is heavily biased against the Indian household depositors while it offers huge bank funds to the privileged corporate class at subsidised rates. This in fact amounts to robbing the poor Peter to pay the rich Paul.

(K V George is secretary of the Kerala state unit of Bank Employees Federation of India --- BEFI.)