Savings a/cs get raw deal, feels Udeshi

Individuals account for 77 per cent of savings bank deposits, forming the mainstay of banks' credit operations, but they get a raw deal from both the banks as well as the government.

This was stated by K J Udeshi, chairperson of Banking Codes and Standards Board of India (BCSBI) and former Reserve Bank of India deputy governor, in her address to depositors on the occasion of the world consumer rights day today.

She felt there is no reason for banks to continue the practice of paying the 3.5 per cent interest on savings account balances only on the minimum balance during the period from the tenth to the end of every month.

"In these days of electronic wizardry is it necessary to continue to follow this methodology for the ease and convenience of banks at the cost of the depositor?" Udeshi asked.

The effective interest paid on savings account balances is as low as about 2.8 per cent. This is because the manner of calculation of interest excludes a part of the deposits.

She said these low-cost funds were leveraged by banks and lent at high rates of interest which is a main source of their profits.

According to statistics published in the RBI bulletin in July 2006, as on March 31, 2005, savings bank deposits amounted to Rs 472,147 crore, forming 26 per cent of total deposits of scheduled commercial banks.

She said regrettably depositor interests had received low priority even from the government. "Why is it that income earned through savings bank deposits at a mere 3.5 per cent rate of interest attracts income tax, whereas income earned through investments in equities and mutual funds are tax free?" Udeshi asked.

Moreover, longer-term bank deposits, at relatively higher interest rates, enjoy 80C deduction from income while this is not available to savings bank accounts. The system, therefore, appears to be stacked against the common man, she said.