August 20, 2010

INDIA: State Bank of India’s Fixed Deposit floating rate plan may hurt elders

Senior citizens, looking for assured returns, may be left in the lurch with the country’s largest lender, the State Bank of India, announcing a new floating interest rate regime for fixed deposits.

Paramita Chatterjee of  THE ECONOMIC TIMES, New Delhi, reported on August 20:

Going by the new ‘floating’ rate regime, parking money in bank fixed deposits may not be a simple affair any more, as the return on the fixed deposits would be linked to the base rate. Going by the volatile interest rate scenario in India, the rate is expected to change quarterly or half yearly.

“Retired people do not need uncertainty but certainty. It doesn’t matter if returns are a little lesser, all they require is assured returns,” said SB Mathur, former chairman of public life insurer Life Insurance Corporation. In case of floating products, people would find it difficult to plan their future income, he added.

The attractiveness of FDs among senior citizens was risk-free assured returns and easy liquidity. The new regime would inject an element of risk as returns would become a function of the base rate, which itself would change according to RBI’s policy rates, macro-economic conditions and banks’ other statutory fund costs that could fluctuate nearly every quarter.

THE ECONOMIC TIMES further added:

The base rate, introduced from July 1, serves as the minimum floor rate, below which banks cannot fix interest rates from any class of their borrowers. In order to mitigate the risk, SBI has now launched base rate fixed deposit schemes, which is expected to gather momentum in the coming days, feel bankers.

“As long as these products are optional, it’s fine. Consumers should have the maturity to choose what they want,” said Allen Pereira, CMD of Bank of Maharashtra.

“People will have to learn to live on market-driven returns unlike the current scenario of assured returns. Since the base rate is linked to inflation, it’s a double-edged sword. Income may go up if prices firm up. But there are chances that they may go down if prices start easing,” said Union Bank CMD MV Nair.

In almost all the developed markets, returns on FDs are linked to the market. In India, it is currently an optional proposition. However, if this product becomes popular, it is quite possible that plans with assured returns may be driven out, said a senior banker on condition of anonymity. “Fixed-rate returns may become history over the next few years as banks are likely to focus more on market-linked deposit rates to reduce the risk of asset-liability mismatch,” he said.

Currently, total deposit in banks in the domestic market stands at Rs 46 lakh crore, of which 65-70% comprises fixed deposits, as per industry estimates.

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