Monetary policy: Common man's perspective
The governor of the Reserve Bank of India (RBI), Dr D Subbarao, announced the Annual Monetary Policy for 2013-14 on May 3, 2013. The annual policy is significant, as both monetary policy and developmental and regulatory policies are covered. While the policy has a large number of measures, this column is restricted to a few issues which directly impinge on the common person.
Implications of Lower Repo Rate
Against the backdrop of a large balance of payments, the Current Account Deficit (CAD) of 5 per cent of GDP in 2012-13, a Consumer Price Index (CPI) increase, on a year-on-year basis at the end of March 2013 of 10.4 per cent (since come down to 9.4 per cent for April 2013), the RBI reduced the repo rate, i.e. the rate at which it lends to banks, against holdings of government securities, from 7.5 per cent to 7.25 per cent. Of course, the reduction of the policy rate is defended as a response to the Wholesale Price Index (WPI), which showed an increase at the end of March 2013 of 6 per cent (later data for April 2013 shows an even lower inflation rate of 4.9 per cent).
While banks have not immediately reduced their deposit rates, there will be an inevitable downward movement of deposit rates. Individuals would be well-advised to lock into the two-year maturity for fixed deposits, as any significant increase in deposit rates can be ruled out for the next 12-18 months. The government diktat to public sector banks to reduce or eliminate the additional premium for senior citizens is indeed cruel.
As regards shorter term surplus funds, most individuals leave such balances in savings bank accounts, which, in most banks, earn a low rate of return of 4 per cent. As a matter of discipline, depositors must develop a practice of moving funds out of savings bank accounts and put them in short-term deposits of seven days with automatic roll-over instructions; such fixed deposits earn significantly more than savings bank accounts. Withdrawal after a seven-day block will not lead to any loss of interest. The All-India Bank Depositors' Association (AIBDA) would do well to publicise this option. If depositors move out of savings bank accounts, which offer only 4 per cent, banks will start opting out of the informal cartel arrangement. The AIBDA needs to articulate that cartelisation is against the interests of depositors and should be examined by the competition commission. The RBI needs to counsel banks that most banks fixing the rate at 4 per cent could conceivably be considered as cartelisation.
According to the policy statement, the triad of financial inclusion, financial literacy and consumer protection are intertwining threads in the pursuit of financial stability. Dealing with these issues in a connected and coordinated manner will greatly enhance the effectiveness of these measures. The attainment of financial inclusion is not going to be an easy task and would need years of work. Nonetheless, it would ultimately be rewarding.
The implementation of the Financial Inclusion Plan (FIP) for 2010-13 has led to the establishment of banking outlets in more than two lakh villages. The policy statement stresses that it is necessary to take financial inclusion to the next stage. The target of universal coverage to facilitate direct benefit transfer for delivery of social welfare benefits by direct credit of the bank accounts of beneficiaries will require a stupendous effort of opening accounts for all eligible individuals. Accordingly, banks have been directed to draw up the next FIP for the period 2013-16. One would not underestimate this stupendous task, but there has to be an on-going assessment of both success stories, as well as failures, which would facilitate the attainment of the goals.
Under the Lead Bank Scheme, districts in metropolitan areas are excluded. It is recognised that financial exclusion is also widespread in metropolitan areas among the disadvantaged and low-income groups. This will require a very different approach, as compared with the rural areas, as in the urban areas, these segments are itinerant.
Financial Literacy and Awareness
In order to link financially excluded segments with the banking system, models for conduct of literacy camps by banks have been prepared to culminate in effective financial access. The RBI is now empowered to establish a Depositor Education and Awareness Fund (DEAF), which would be credited with balances in deposit accounts which are not operated for ten years. The fund would be used for promotion of depositors' interest. If a rightful beneficiary comes up with a valid claim, DEAF would provide a refund of the amount.
It is increasingly recognized that contracts between banks and customers are invariably stacked against the customer and while a lot has been done to provide customer protection, much remains to be done.
Informal and Formal Financial Sectors
It is well-known that many disadvantaged persons hold bank deposits and yet borrow from the informal market at rates as high as 60 per cent per annum (without security) or 24 per cent (with security). Rudimentary financial literacy would avoid such pathetic situations. These are not minor issues, but are widespread, hence there is a need to strengthen the law as well as the regulatory system. It is well-known that for the disadvantaged, what is vital is the availability of credit and not its cost. Excessive preoccupation with low interest rates is counter-productive, but somewhat higher interest rates in the organised financial sector, albeit much lower than in the informal sector could ultimately benefit the disadvantaged.
Way back in the late 1960s and the early 1970s, considerable work was undertaken on developing links between the indigenous banking system and the formal banking system. In this context, the Banking Commission had undertaken useful work. In the aftermath of the bank nationalisation in 1969, the view taken was that the formal banking system would eventually supplant the indigenous banking system and, as such, there should be no link between the two systems. Unfortunately, 44 years after the nationalisation of banks, the indigenous banking system still thrives.
The Rajamannar Working Group, set up by the Banking Commission) had drafted a legal code for indigenous banking and provided for the revival of the link between the formal and informal segments, with the rediscounting of the Hundi by banks. Incidentally, the first class Hundi had an immaculate track record, without failure of payment of the Hundi on due date. In the context of the current comprehensive review of the financial legislative structure, a detailed assessment needs to be made of restoring the link between the formal and informal markets through the Hundi. One cannot just wish away the indigenous banking system
Please Note: This article was first published in The Free Press Journal
on May 20, 2013. Syndicated.
This column, Common Voice is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Hindu Business Line, is titled Maverick View.
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