Low deposit rate will hurt small savers

The decision of banks to decrease interest rates to single digits may boost investment but the middle-income groups or small savers may be affected the most. With stock market in disarray, no social security system and rising healthcare cost, fixed deposits in banks have been the last resort for many of those depositors. Now, the lowered deposit rate, which is almost the same as the inflation rate, will discourage them to keep their money in banks and, in the process, dry up banks that are in dire need of money.

The only alternative to the fixed deposit has been the government's saving instrument, Sanchaypatra, but it is largely exploited by the rich rather than the intended beneficiaries, the middle-income savers. Moreover, 10 percent tax has been levied on interest earned from fixed deposit and bonds. The government has also decided to reduce its borrowing through saving certificates. Therefore, many may soon be left with almost no alternative.

In terms of interest rate, there should be a balance so that investment is encouraged and the small savers are not hurt. The proposed deposit rate (six percent) and lending rate (nine percent) will leave banks with a spread of three percent. Such a spread is hardly profitable for banks due to the gigantic size of their non-performing loans. Moreover, a decreased lending rate will do little to incentivise investment if the malgovernance in the banking sector remains unresolved.

Therefore, unless the government addresses the issue of non-performing loans and poor lending practice in banks, investment will not be encouraged, a lower lending rate for desired investment boost will not be sustainable and the small savers will suffer badly. Cleaning up these anomalies in banks is where the key to solution lies.