BOTH public and private banks have decided to lower lending rates to single digits from July 1 — a move that comes weeks after the government showered them with a raft of privileges, drawing criticism from different quarters. There will also be a cap on the deposit rates so that those remain in tune with the lending rates. Private banks have set the deposit rates at 6 percent while the public ones are yet to decide on it, as per local media reports.
A number of economists have pointed out that the cut in deposit rates will affect savers. Currently, private banks’ lending rates hover between 10 and 16 percent while savings deposit rates are below 6 percent. But the fixed deposit rates on schemes for three months to three years are between 5 and 10 percent. However, interest rates on all types of deposit schemes in state banks are between 3 percent and 6 percent. Their lending rates vary from 11 percent to 13 percent.
This is an attempt to influence public opinion to justify the privileges, including reduction in corporate tax, which have been given to the bank owners. It is just a voluntary announcement as there is no monitoring and enforcement mechanism. Banks may not be able to implement the decisions because they did not devise any mechanism on how the rate will be brought down to 9 percent.
Depositors will not be inclined to get just 6 percent when they can get around 9 percent from government savings bonds. So exactly how the banks will manage to get funds at 6 percent so that they can lend at 11 percent remains a mystery. Most citizens like pensioners who have amassed huge savings or pensions will be more inclined to park the funds in government bonds.
Similarly as the saying goes you can take the horse to the water–but as for making it drink, it’s another story. Modern economics theories predict that the confidence levels of business leaders in the economy remain one of the best drivers of growth and investment. Even if interest rates were to fall magically to zero it could potentially have no effect if the economy did not have strong demand led growth. And that’s what we need to address. There is no magical solution to growth–one can’t just put a wand to it.
