Are Savers in India Getting a Raw Deal?

Oct 5, 2016

In this issue:
» NBFCs pare dependence on bank funding
» 69% of the jobs in India are under threat
» ...and more!
Radhika Pandit, Managing Editor of ValuePro

Yesterday, the RBI cut interest rates by 25 basis points and the stock markets cheered. This monetary policy was interesting for a few reasons. For one, it was the first review by the newly appointed governor, Mr Urjit Patel. And as opposed to the governor who had the final say on rate cut decisions, as had been the practice before, it was made by a committee with equal representation from the RBI and the government.

The rationale for the cut: Inflation is easing and expected to come within the comfort level of the central bank. It must be noted that a rate cut has been expected since the start of the year. But erstwhile governor Dr Rajan chose to keep rates unchanged.

India Inc also appears to have welcomed this move. Corporates expect rate cuts to be beneficial in many ways. For indebted companies and capital-intensive industries (such as power and real estate), the rate cuts will translate into less interest outgo. Other sectors, such as auto and banks, opine that less interest on loans will spur demand for their products. All in all, it is hardly surprising that corporate India and borrowers in general are quite happy with this move.

But what about savers in the country? Vivek Kaul wrote on this subject in his Diary earlier this year:

  • If interest rates need to fall over the long-term, the household financial savings number needs to go up. And this can only happen if households are encouraged to save by ensuring that a real rate of return is available on their investments. The real rate of return is essentially the rate of return after adjusting for inflation. A major reason why the household financial savings have fallen over the years is because of the high inflation that prevailed between 2007 and 2013.

    It needs to be mentioned here that while the household financial savings have fallen over the years, the private corporate financial savings (basically retained profits of companies) have gone up over the years. In 2007-2008, the private corporate savings had stood at 8.7% of the GDP. In 2014-2015, they stood at 12.7% of the GDP. So, a fall in household financial savings has more than been made up for, by an increase in corporate financial savings.

    The trouble is that corporates do not like to lend long term in the financial system. Most of the private corporate savings are invested in short term bonds and mutual funds which in turn invest in short-term bonds. Hence, corporate savings are typically unavailable for long-term borrowers. They need to depend on household financial savings.

This means that household savings must go up, which can only happen if the rates offered on their deposits and savings are attractive. That's not all. Vivek continues:

  • The borrowing by state governments is expected to remain high in the years to come. This is primarily because of the UDAY scheme that the central government has launched to sort out the mess in the power distribution companies all across the country.

    Hence, the demand for money which can be invested over the long-term has gone up over the years and is expected to continue to remain high. In this scenario, the supply of money, through household financial savings needs to improve.

The Western world, since the 2008 global financial crisis, has only really focused on helping borrowers and encouraging spending. The near-zero rates are a testimony to that. Savers have gotten a raw deal.

India, in that sense, was different. And during his tenure, Dr Rajan was clear that he wanted to maintain a real interest rate level of 1.5-2%.

Is this what the new governor Mr Patel also wants to achieve? Or does he have other goals?

A clearer picture will emerge in the coming months. And Vivek Kaul, through his unique newsletter The Vivek Kaul Letter, will continue to give a thorough and insightful analysis on this relevant and hotly debated topic.

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03:01 Chart of the day

Non-Banking Financial Companies (NBFCs) largely depend upon banks to source funds for their lending operations. NBFCs borrowed bank funds to the tune of over Rs 3 trillion in the past two years. This is because unlike banks, they do not have access to cheap public deposits. However, in recent years, NBFCs have increasingly resorted to bond market borrowings. So the share of loans to NBFCs in bank's non-food credit has stagnated at around 5% since FY12.

During this period, bond issuances by NBFCs have grown at a robust pace. In fact, NBFCs account for more than 60% of bond issuances in a year. The bond market has also given NBFCs access to cheaper funds as bond yields are typically lower than bank lending rates by more than a percentage point. While large NBFCs are able to raise funds through bonds at the most competitive rates, it still remains a challenge for the small NBFCs that have low credit ratings.

Steps taken by Reserve Bank of India to increase the depth of the bond market is expected to benefit NBFCs in the long run. Along with their clean balance sheets, NBFCs are well positioned to grow their loan books at a time when most of the public sector banks are struggling under the huge pile load of bad loans. In fact, NBFCs are also foraying in segments such as working capital loans that have traditionally been the bastion of banks. This is reflected in the steep credit growth reported by them. In the past three years, NBFC's increased their loan book by 37% which is nearly two times the growth reported by banks over the same period.

NBFCs Pare Dependence on Bank Funding


Technological advancements can greatly simplify the lives of people. However, the ensuing automation can also result in the loss of many jobs. As per World Bank, 69% of the jobs in India face the threat of getting substituted with automated technology. This spells bad news for a country already struggling to create new jobs for millions of youth joining the workforce each year.

According to World Bank, technological disruption can the normal economic path of development for developing countries. And if India needs to capitalise on the demographic advantage, it not only needs to promote investment in infrastructure but also think about the kind of infrastructure to be built in the economy of the future.


After opening the day flat, Indian equity markets continued to trade near the dotted line. At the time of writing, BSE Sensex was trading lower by 48 points and NSE-Nifty was trading lower by 10 points. Each of the mid cap and small cap indices are trading higher by up to 0.6%.

04:56 Today's investment mantra

"The best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago." - Warren Buffett

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