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It's Time to Treat Deposit Holders with Some Respect

Aug 26, 2016


Take a look at the following chart. It shows the various kinds of savings that made up for household financial savings in 2013-2014 (the latest data that is available on this front).

Deposits constituted close to 63.3 per cent of the total household financial savings. Banks deposits formed around 56.7 per cent of the total household financial savings. Hence, bulk of the Indian savings are in the form of deposits in general and bank deposits in particular.

Housing Financial savings in 2013-2014

Shares and debentures formed around 1.5 per cent of the total household financial savings. Within that, investment in mutual funds constituted around 0.98 per cent of total household financial savings. Further, investment in shares and debentures of private corporate companies constituted around 0.46 per cent of total household financial savings.

What this tells us very clearly is that the Indian financial media spends a disproportionate amount of time and space, discussing stocks, debentures and mutual funds. A very small segment of India's population actually invests in them. This also largely explains why the pink newspapers in India, have such small circulation numbers, given that most of the stuff they publish remains irrelevant to a large section of the population.

What the above chart clearly tells us is that deposits are the main form of savings in India. First and foremost, these deposits help both the union as well as the state governments in India. It is mandatory for banks to invest a certain proportion of their deposits in government bonds (i.e. bonds issued both by the union government as well as the state governments).

The statutory liquidity ratio as this ratio is referred to as is currently at 21 per cent. Hence, for every Rs 100 raised as deposits, banks need to invest at least Rs 21 in government bonds. As on August 5, 2016, 29.3 per cent of aggregate deposits of banks were invested in government bonds.

With so much money chasing government bonds, it allows the union government to raise money at a lower rate of interest than would have been the case, if it was not compulsory for banks to invest in government securities.

Over and above the banks, the provident funds as well as the insurance companies also need to compulsorily buy government bonds. This allows the government to raise money at lower interest rates, than would have otherwise been the case.

Further, given that deposits are the main form of savings, it is this money invested by deposit holders with banks, that ultimately finds its way into the lending carried out by banks. It finances almost everything from homes to cars to two-wheelers to credit card spending to infrastructure projects to corporate takeovers.

But for all that they do as a whole, the deposit holders don't get treated well. In fact, rarely do they even get a rate of interest on their deposits, which is higher than the rate of inflation. Take a look at the following chart.

Average Reat Rate of Return on Deposits

It shows that between 2009 and 2013, the interest rate on fixed deposits was lower than the rate of inflation. This basically meant that the purchasing power of the money invested in deposits, had been going down. Between mid-2014 and now, the rate of interest offered on fixed deposits of one year or more, has been higher than the rate of inflation.

But in the recent past, this gap has started to narrow again. Also, for those in the higher tax brackets, the real rate of return after paying tax on interest that they earn on fixed deposits, must already be in the negative territory. The real rate of return is essentially the difference between the nominal rate of interest on a fixed deposit minus the rate of inflation.

One of the ironies of the Indian tax system is that income that is earned as capital gains is either not taxed at all, or taxed at lower rates, than income which is earned as an interest on a fixed deposit. Further, capital gains made on selling a house or a debt mutual fund are even allowed the benefit of indexation. The question is why are fixed deposit investors not allowed the benefit of indexation as well, while paying taxes?

Indexation basically allows to take inflation into account while calculating the price of acquisition of an asset. This essentially ensures that the capital gains come down. And in the process, so does the tax that needs to be paid on the capital gains.

Such benefits are not available to those who invest in fixed deposits. If all this was not enough, politicians and bureaucrats keep talking about the need for lower interest rates all the time. This is something I discussed in yesterday's column, where the commerce and industry minister, Nirmala Sitharaman, had talked about the need to lower interest rates by 200 basis-points to help the micro, small and medium enterprises(MSME) sector.

The finance minister Arun Jaitley has in the past on multiple occasions talked about the need for lower interest rates on fixed deposits. In fact, sometime back, Jaitley even said that people should be investing their money in mutual funds, bonds and shares, that finance projects and lead to economic activity. As if fixed deposits do not finance economic activity. For the finance minister of the nation to be saying something as remarkably silly as this, is surprising indeed.

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As I explained earlier in the piece, fixed deposits are ultimately loaned out by banks and this creates economic activity in the process. The money invested in fixed deposits is also invested in government bonds which finance the government. Government bonds essentially help finance the fiscal deficit. Fiscal deficit is the difference between what a government earns and what it spends. The money spent by the government also creates economic activity. Hence, saying that fixed deposits do not create economic activity is totally incorrect.

Also, fixed deposits need to offer a real rate of return. One reason for this is that they are used by senior citizens to generate a regular income. In a country, where there is very little social security on offer along with the fact there is almost no specialised care for the elderly and a medical system which basically robs everyone, the least that we can do is to ensure that the interest on fixed deposits is higher than the rate of inflation. Also, as I keep saying deposits are also used to build a corpus for retirement and weddings and education of children.

Given the reasons cited above, it is important that the government treated the deposit investors with some respect and not make them the fall guy, all the time.

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.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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27 Responses to "It's Time to Treat Deposit Holders with Some Respect"

Wg Cdr Sanjay Arora (Retd)

Aug 31, 2016

Brilliant Vivek. Clear case of Politician -bureaucratic-industrialist nexus to siphon money from the gullible common man. Any ideas on how to beat this Crony capitalism??



Aug 29, 2016

Dear Mr.Kaul,
I fully agree with your views.Senior citizens are mainly dependent on Interest earnings on bank fixed deposits.Raising of deposits interest rates need of the hour


venkatramana rao

Aug 28, 2016

very nice,well researched article. As an ex banker I can understand the article's worth. But, the so called intelligent ministers dealing with finance and commerce are having a blind eye G O K.



Aug 27, 2016

I fully agree with you on the plight of fixed deposit holders especially senior citizens who opts this as a safe mode. While these MPs and MRS ensure they get sizable pensions, they never bother about those who retired from private sector who do not receive any pension. Instead of ensuring inflation proof interest on their savings , ministers keep talking about lowering the interest rates. Hope good counsels will prevail and interest on senior citizens' will be taken care of



Aug 27, 2016

Yes i fully agree with the views expressed.we must pressurise govt to extend proper treatment to fixed deposit holders & initiate/organise movement for the same.

Like (1)

R K Sharma

Aug 27, 2016

Your article on deposit rates is worth reading by all depositors. Unfortunately , our depositors are mostly rural, uneducated lot with no or little knowledge of how rates are to be compared viv a vis inflation. As a retired senior bank executive I feel we should pay in real terms to the depositors, more so to the senior citizens who are totally dependent on regular interest income

Like (1)

indrakant sulibhavi

Aug 26, 2016

For common man what is alternative to fixed deposits?Do you suggest mutual to be better alternative to FD?

Like (1)


Aug 26, 2016

I think so long as Arun Jaitley is FM of India attitude towards senior citizens and tax payers is not going to change.He is cut off from real life of ordinary people.He acts on the aid and advice of his bureaucrats. His Voluntary disclosure scheme is going to be big flop.The Economic Times had published an article by S S Bagai "Wider the net lower the haul" ( 20 April 1998. Bagai had written," As soon as a new finance minister takes over, the bureaucracy is able to plant in his mind the apparently attractive but totally irrelevant idea of further widening the tax base by sticking to the current exemption limit.Thereafter the minister himself starts preaching it with all the real zeal of a new convert."By keeping deposit interest low and taxing even this lower interest is against the interests of large number of our old and retired persons whose main source of sustenance is interest on deposits.Deposits, particularly medium to long term, should be given high interest along with 100% tax exemption.This generates funds for the government and is the main source of capital formation in India.

Like (1)

Goutam Chowdhuryrd

Aug 26, 2016

Absolutely corrrect.I am a Senior Cityzen.There is no Social Security.Senior need more protection in India.They are fully dependant on Interest of Fixed Deposit and SCSS by Central Investing their whole life hard earned money.

Like (1)

Bhudeb Mukherjee

Aug 26, 2016

Well written article Mr.Vivek Kaul. Agree with you on all the points covered. Alas our ministers and their serving beauracrats will never listen because their agenda is different.

Like (1)
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