THIS refers to the article 'Uninteresting cumulative interest' by A N Shanbhag (BS, 30-8-96). The author pertinently warns greedy depositors, about the dubious interest rates advertised by finance firms "" wherein the effective interest rate is much lower than the stated rate.
Firms use creative methods to arrive at glamorous rates, though the inherent effective rate is much lower. A N Shanbhag had illustrated a real life case "" where Times Bank advertised 22.67 per cent for deposits (in big fonts occupying half a page advertisement). But its effective rate is only 15.87 per cent. Presently, this contagious disease has spread even to most regulated and trust worthy banks. Most of the unincorporated finance firms apart from being bogus, adopt the same ploy.
As of now, there is no standard nomenclature (terminology) for reporting interest rates. This enables finance firms to tease depositors by number game. Most often middle-income-salary-class get intoxicated by looking at the knockout rate of interest.
Efforts by anyone, including A N Shanbhag and HDFC chairman, to warn about such malpractice will be futile if the RBI does not act. It is imperative that the RBI assumes Sebi as its role-model in disclosure aspects. When firms invite deposits through advertisements, three aspects are called for:
nInterest rate reported should be the effective rate of interest (standardised method of interest calculation). Say compound interest "" per annum rate.
nInterest rate alone will not suffice the depositor. He will have to bother about the safety of his deposit. So 'risk factor' needs to be reported in juxtaposition with the interest rate. This can be credit rating or the fact that no credit worthiness is assessed.
nFor companies tapping the capital market, Sebi should specify the font size parity in printing risk factor. Similarly, the risk factor should be subject to minimum font size. This will check the present 'asterisk ploy' in obscuring the critical aspects.
The RBI should pull the string on banks and NBFCs. They should be made subject to above disclosure in advertisements inviting deposits. This will tune the public as to what they should look for - in assessing deposits. As a result, unincorporated finance firms will follow the suit.
