Interest earned by Indians on bank deposits at record low

Interest rates on a normal savings account have remained constant under the NDA government at 4 per cent

The amount of interest earned by millions on their small savings and fixed deposit accounts has hit an all-time low. This has been revealed in the Indian Public Finance Statistics for 2015-16, released by the finance ministry on Thursday.

The interest rates on a normal savings account have remained constant under the NDA government at four per cent. With consumer inflation above five per cent in August this year, a regular savings account holder is actually losing money.

While savings account rates were a constant, there has been a decline in all other term rates. A fixed deposit for three years was earning an interest rate of 8.4 per cent under the erstwhile UPA-II regime and first year of the NDA government. However, over the last year, the interest rates on such deposits have declined by a per cent. Those with one and two-year maturities now earn 7.1 per cent and 7.2 per cent, respectively. The popular tax saving and long-term planning instrument of the middle class — the five-year fixed deposit — now carries an interest rate of 7.9 per cent, instead of 8.4 per cent a year ago. At the start of the 21st century, the interest earned on a fixed deposit was more than 11 per cent.

Those looking to save for a car or a honeymoon with a recurring deposit too have been left in the lurch. Interest rates on these regular saving schemes are down by a per cent to 7.4 per cent, compared with last year.

Also hit hard in this low-interest rate regime are retirees and senior citizens who rely on the monthly income scheme of India Post. The return on their savings is down to 7.8 per cent from a high of 8.5 per cent during UPA-II. The Senior Citizens Savings Scheme (SCSS) rates have fallen by close to a per cent as compared to 9.3 per cent last year.

People looking to save tax and accumulate money for a future exigency through the National Savings Certificate (NSC) have also been impacted. Not only did the government discontinue the high interest yielding 10-year NSC in December 2015, the interest rates on five-year NSCs too have fallen to 8.1 per cent, compared with 8.5 per cent last year.

Public Provident Fund (PPF), the preferred post-retirement corpus of millions of Indians, now gives 8.1 per cent interest to depositors, compared with 8.7 per cent in the previous year.

Finance Minister Arun Jaitley has been advocating for lower interest rates as a measure to reinvigorate investment in India. Jaitley’s logic is this — if banks pay their depositors less interest, they would be able to lend at lower rates to businesses, which would encourage them to borrow more, invest more and, in the process, create more jobs for 13 million Indians entering the workforce every year.

But banks haven’t really reduced the rates at which they lend while reducing the interest they pay to depositors. Despite the fact that the RBI, under Raghuram Rajan, had cut its benchmark rates by 1.5 per cent since 2015.

One of the reasons for the banks’ behaviour is their astronomical non-performing assets (NPAs) that have touched Rs 5.4 lakh crore in 2016. N R Bhanumurthy of the National Institute of Finance and Public Policy says, “Banks have reduced interest rates in a bid to clean their books. If banks cannot recover their loans from defaulters like Kingfisher Airlines, then the losses will have to be offset by reducing the interest rate on the savings of ordinary depositors.”