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Mr Jaitley, Depositors Don't Have a Union, It's Easy to Take them for a Ride

Jul 13, 2016


The finance minister, Arun Jaitley is at it again, demanding lower interest rates. As he said, late last week: "Now, whether domestic savings are only to be used by such instruments which give you a higher return and create an interest regime which is extremely costly and makes the economy sluggish, or higher returns are to be got from such instruments as funds, bonds, shares."

Jaitley further said: "A lot of them have also an element of secured investment in them which can give people a very respectable return itself."

Normally, Jaitley's statements on interest rates in the past have been as straightforward as, I demand lower interest rates. But this time around, he has made a long and a convoluted statement, which basically means the same.

So what Jaitley is saying here is that people save money with banks. The interest rates on bank fixed deposits are high. Given that interest rates on bank fixed deposits are high, the interest rates on bank loans are high. Since interest rates on bank loans are high, people and companies are not borrowing, and this makes the overall economy sluggish.

Hence, people should be investing their money in mutual funds, bonds and shares that finance projects and economic activity.

This is what happens when people make statements without looking at numbers. In fact, growth in retail lending carried out by banks in 2015-2016, has been the highest since 2009-2010. So clearly retail lending is growing at a very robust pace. The so called high interest rates on bank lending, clearly hasn't had much of an impact on this front.

DatesRetail lending growth
March 20, 2015 to March 18, 201619.40%
March 21, 2014 to March 20, 201515.50%
March 22, 2013 to March 21, 201415.50%
March 23, 2012 to March 22, 201314.70%
March 25, 2011 to March 23, 2012 12.90%
March 26, 2010 to March 25,201117.00%
March 27, 2009 to March 26, 20104.10%
Source: Sectoral Deployment of Credit Data, RBI

The problem has been in bank lending to industry. The lending growth to industry in 2015-2016 slowed down to around 2.7 per cent. In comparison, it grew by more than 23 per cent, during the go go years between 2009 and 2011. But a lot of that lending was to crony capitalists.

Banks have not been lending to industry, because of all the bad loans that they have accumulated on the lending to industry, in the past. Also, many corporates continue to be heavily leveraged, even though things did improve a little in 2015-2016.

As the RBI Financial Stability Report released in late June points out: "An analysis of the current trends in debt servicing capacity and leverage of 'weak' companies [defined as those having interest coverage ratio (ICR)<1]was undertaken...[It] indicated some improvement in 2015-16. The analysis shows that 15.0 per cent of companies were 'weak' in the select sample as at end March 2016, compared to 17.8 per cent in March 2015. The share of debt of these 'weak' companies also fell to 27.8 per cent of total debt in the second half of 2015-16 from 29.2 per cent in the second half of 2014-15. However, the debt to equity ratio of these 'weak' companies increased to 2.0 from 1.8."Interest coverage ratio is the ratio of the earnings before interest and taxes of a company during a period divided by the interest that it needs to pay on its accumulated debt during the same period. This basically reflects the ability of the company to finance its debt. An interest coverage ratio of less than one basically means that the company is not making enough money to be able to repay the interest on its accumulated debt.

The RBI categorises these companies as weak companies. The proportion of these companies fell to 15 per cent as on March 31, 2016, in comparison to 17.8 per cent earlier. Nevertheless, these companies still had around 27.8 per cent of the total bank debt. Further, their debt to equity ratio deteriorated to 2 from 1.8.

Given that many companies continue to be highly leveraged along with the fact that they are not making enough money to be able to service their accumulated debt, it is but natural that banks do not want to lend to these companies.

The purpose of any bank is not to get the economy going by lending. It is to lend money to customers who are likely to return it. At the same time, they need to charge an adequate rate of interest, which basically takes the credit risk (or the chances of a default) of customers into account.

Also, Jaitley's statement seems to suggest that corporates are just waiting to borrow money and expand. And the high interest rates of banks are stopping them from doing so. The data clearly suggests otherwise.

As per the Order Books, Inventories and Capacity Utilisation Survey (OBICUS) survey carried out by the RBI, for the period October to December 2015, the capacity utilisation of 1,058 manufacturing companies which responded to the survey, stood at 72.5 per cent. This was slightly better than the period July to September 2015, when it had stood at 71.4 per cent.

But on the whole capacity utilisation continues to be low. More than one fourth of manufacturing capacity is still not being used. In fact, the situation is even worse than this in some sectors. As Manasi Swamy of the Centre for Monitoring Indian Economy points out in a research note titled Why should manufacturers invest more?: "Large manufacturing industries like cement, steel, sponge iron and aluminium worked at an estimated capacity utilisation of 65 per cent or lower in 2015-16. Automobile companies too have enough capacity to meet any increase in demand. The passenger cars industry is running at 63 per cent capacity utilisation level, two-wheelers at 76 per cent, commercial vehicles at as low as 37 per cent and tractors at 63 per cent. Capacity utilisation levels in industries like paper and textiles are also quite low."

Over and above this, the return on capital employed for the manufacturing sector has fallen from 11.7 per cent in 2006-2007 to 3.8 per cent in 2014-2015, Swamy points out. In this scenario it is safe to say that industry is also not interested in borrowing more to expand. They may welcome lower interest rates because that will help them service their existing debt in a better way. But that is another issue altogether. Also, Jaitley seems to suggest that investing in stocks and mutual funds leads to entrepreneurs being able to raise capital. This doesn't hold true anymore. Public issues these days are basically about investors trying to sell out their stakes in companies. It is rarely about entrepreneurs funding expansion by selling shares. These investors can be venture capitalists, private equity firms or even the government.

Further, banks raise deposits to give out loans. And these loans are also helpful for the economy. If retail lending is growing at close to 20 per cent, it is benefiting vehicle companies, consumer durable companies, as well as real estate companies. What about that? How is that not helping the economy?

Also, the basic question that Jaitley needs to answer is that if the Indian economy grew by 7.6 per cent in 2015-2016, how is the economic growth sluggish? The finance minister cannot have it both ways. When he wants to project the government in good light he says, India is the fastest growing major economy in the world. When he wants lower interest rates and show the RBI in a bad light, he says the economic growth is sluggish.

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Another point I wanted to make is that the government can play a huge role in bringing down interest rates further. Currently, the difference between fixed deposit interest rates and the interest rate offered on post office small savings schemes is anywhere from 40 to 160 basis points. One basis point is one hundredth of a percentage. Banks compete with post office schemes when it comes to taking on deposits and cannot keep cutting interest rates on deposits beyond a point. Further, I think Mr Jaitley must clearly not have forgotten all the ruckus that was created when the government tried to cut the interest rate on the Employees Provident Fund(EPF) by 5 basis points to 8.7 per cent. This would have meant that contributors to the EPF would have got a lower interest of Rs 50 less per lakh, during the course of the year. To break it down further, it would have meant a lower interest of Rs 4.5 per month per lakh, for those who contribute to the EPF. The government couldn't even push this through.

The current interest rate on EPF is 8.8 per cent. This is close 100-180 basis points higher than the interest rate on fixed deposits, without taking into account that interest rate on fixed deposits is taxed, whereas interest on EPF is tax free. Why should there be such a huge difference in interest rates? How about some fairness on this front Mr Jaitley?

Of course, those who contribute to EPF are an organised lot and can create a lot of hungama if the government decides to cut the interest rate. The same cannot be said for a normal depositor who is placing his money in the bank in the hope that it grows in the years to come. The depositors do not have a union and hence, it's easy to take them for a ride.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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23 Responses to "Mr Jaitley, Depositors Don't Have a Union, It's Easy to Take them for a Ride"


Jul 22, 2016

All FMs want to reduce interest rate knowing fully well it is NOT going to kickstart the economy. No industrialist wants to risk his capital by adding capacity as demand is not there .Banks are reluctant to lend to agriculture in a big way as repayment culture is already vitiated.If interest rates are reduced,investors will flock to ponzi schemes and lose. Those who invest in MF/Stockmarket will also lose as investment will be made at peak of cycle.



Jul 21, 2016

Views of Mr Vivek is similar to that of the FM.

India does not have Social Security.We are worse than the THIRD WORLD when comes to Social Security. Questioning the higher PPF / EPFO Interest rates is not in good spirit. Just to remind that EPFO interest is not paid from Government or subsidised from the Budget. EPFO just distributes its returns from the Corpus. The current year's return will be almost equal to that of average of the previous 10 years returns. The reason is simple

1. The Corpus is made up of current year's contribution plus the accumulated corpus of the previous years.
2. The Corpus of previous year would have been invested at the previous year's prevailing interest rate
3. Similarly the very previous year, the Very preseeding year and so on.
4. Marking the entire Corpus to current year's prevailing interest is just convenience and devious.

Let me give an example. I borrowed three years back at 13.80 % interest. I still pay that interest. If I borrow now, the ROI will be 12.65 %.



Jul 15, 2016

I fully agree with Mr.Vivek Kaul. All the finance ministers are keen to reduce the interest rates paid to general public because the public do not organize and protest. Where ever there are unions, they do not and cannot move even a little. Under this circumstances, what happens to retired people, who have worked for several years with meager salaries and therefore very little retirement benefits?. With high inflation and low pension, they can only pray to God for an early death. Mr.Jaitley had declared his assets somewhere around Rs. 60 Crores, whereas most of the people who work for several years will be lucky to make Rs 1 crore in the lifetime. Nothing wrong with this, except the fact that these finance ministers should stop pushing the RBI Governors to reduce interest rates in spite of high inflation. All political parties talk welfare of the common man but forgets him with crony capitalism.

Like (2)


Jul 14, 2016

Before reducing the interest rate , 1st and foremost Mr.Jhetly should make the BILL THAT nobody pays RENT , LEASE , SALRY to anybody FOR ANY SERVICES.

Bcoz there are 4 Ms of MANAGEMENT/RESOURCES.

NOTHING COMES FOR FREE is., to be earned by hard work except bribe & lobby amount.........

Like (2)

Shankar Jog

Jul 14, 2016

Like depositors in banks, salaried people in various fields have no union to fight the levy of income-tax, and any Govt. [Congress or Bjp] finds it easy to attack this soft-target. For many years now, the limit of tax-free income is not increasing in proportion to inflation and also standard deduction was removed without any basis for that. The standard deduction was allowed to salaried people for their expenses incidental to doing the salaried job, like expenditure on carrying out a business. Every Govt. is targeting this class for more tax which is collected without any expenses due to TDS. Other professionals, like Doctors, Engineers, CA's, etc. are paying very low tax, if at all they are paying, since they can hide their income easily and Govt. do not have any easy method to catch them, so they are let loose.
I request you to write an article on this point.

Like (2)

Shreekanth Prabhu

Jul 14, 2016

One suggestion is to cap tax on interest rates at 10%. This not only gives relief to middle classes, but also processing of income tax filing lot easier. All those who have only salary and interest income don't need to go through the process of paying advance tax and then getting return or paying additional tax and so on. This will also make banks more attractive to deposit money even to those in higher tax brackets. Even agriculture income let it be taxed after 10 Lacs or at a flat rate of 10%. Broadly we can divide income into three categories - wage/core income, auxiliary income and risk income and these should attract taxes in an unbundled manner.Overall applicable taxes should get charged then and there even when they are aggregated.

Like (2)


Jul 13, 2016

Vivek Kaul is again at his best in putting the matter clearly & precisely.Very few bother about the truth , that too when it is on the side of the weak.You are one among them.I don't know what our finance minister wants to achieve by this.Is it not his duty to think about the welfare of the common man? is it not like killing the father to give the job to the son. In this case it is not even so. It is going to be simply murder.

Like (2)

jayaraman r

Jul 13, 2016

Today only I understood a little bit of finance. From the details I infer a lobby behind the screen works for reducing rate of interest. The present RBI Governor said by decreasing rate of interest I am not serving creditbly to Nation

Like (2)


Jul 13, 2016

Who is this criticism aimed at? At the unions? Or at the government or at the politics and politicians behind the unions? The EPF rates varied from 3% in 1950s to 12% in 1990s to 8+% in recent years. Earlier changes were in the order of 0.25% (or 25 basis points) and why was there such an uproar for 0.05% (or 5 basis points)? EPF interest was not paid on inoperative accounts, which is paid now. Accounts which could not be transferred due to the lethargy or issues of EPF organization stopped earning interest, which was unfair to the holders. This was rectified. There was no uproar when this was stopped!!

What is the advice in this regard to fix the low utilization ratio of the industries, to clear the logjam, the bad loan problem?

Relatively interest rates will head down over the coming years, if the inflation is contained, as we have one of the highest interest rates and if we get everything right on the way. This makes it imperative for the retired people and the people going to retire to plan for their fixed income or income needed in an appropriate manner. This will get complex unfortunately. Earlier suggestion of forcing the employees to buy annuity plans is not a good solution at all. The other financial products such as equity and mutual funds must be made more transparent, accountable, efficient and mature.

Like (2)


Jul 13, 2016

Arun Jaitley has done nothing worthwhile in his 2 yrs as FM. Jugglery & cheating is possible with some people for some time & not with all people all the time. Efficiency is not visible either with him nor his ministry & surely not the industry. Time & again Govt has allowed fugitives to escape. Targeting small savers is not the solution to India's woes. Not a single crony capitalist has even been tried or FIR lodged. After all at his NW of Rs 105 Crores, he surely does not care for ordinary citizen. As a lawyer too he will make lots of money fighting for unscrupulous guys. It is surprising that not a single bank employee has been taken to task for such huge loans that were given in the past decade. It would be in country's interest if FM is removed.

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