Time for banks to increase FD rates rather than asking for tax breaks from govt: Ajay Bagga
When it comes to fixed deposits as an investment class for Indians tell us how they fared in recent times compared to the other investment avenues especially since we have been hit by the pandemic? Help us put that in context with the tax break in fixed deposits that the banks are asking from the finance minister?
The big issue is the credit year to date as of November 18th. RBI data shows the credit has grown 17% plus and the deposits have grown 9% for the industry as a whole and the numbers which you are sharing for the market leaders it is even more skewed. So the credit deposit ratio is increasing.
Basically banks require more funding in a strong economy where the credit demand is coming back after a number of years. We are seeing credit demand coming back both on the retail side as well as on the corporate side. So to meet this demand the banks are looking for funding sources and the fixed deposit which offers very low returns have been increased by banks recently. But it is not a tax efficient instrument.
So with respect to either a mutual fund or other sources of fixed income products the fixed deposit from banks is not so tax efficient but I would say the government will not consider any such requirement whatever can be given be it the senior citizen’s plan or the five year section 80-C deposit already has been given to banks. What will happen if the government agrees is that there will be a captive segment which will be putting this 5 lakhs and the banks will end up giving 2.5-3% to them.
Again just like it happens on the savings accounts where banks are offering just 2.5% even though their NIMs are going up I think the time is for the banks to increase the interest levels for the customers rather than ask for the government to give a tax dole out.
Most of India’s top private and public sector banks are seeing robust lending growth both in retail and housing. This has happened especially after the pandemic which has led to revised earnings growth as well. We are seeing how the Bank Nifty has done but now in this rising interest rate scenario what do you perceive are the consideration before banks when they set their fixed deposit rates? How much room for manoeuvrability do they actually have when it comes to earnings from the deposits that they draw and consequently offer as credit?
I would say that in this scenario where you have an opportunity to earn rather than keep it as extra gilt investments, government bond investment, you are actually able to earn by taking on credit risk. You have to increase the fixed deposits so asking the government for even a level playing field the mutual fund or the insurance have other concomitant issues.
The only superior product now left in the market is the public provident fund which gives you a tax free return but again that is a lock up of 15 years. So if you are able to put in money for 15 years you get that.
The banks profits are quite strong so banks should increase credit rates to the borrowers and pass it on to depositors as there is enough liquidity in the market. I have been seeing some public sector banks now offering 8% fixed deposit returns and even foreign banks are giving 7.5% for certain tenures. They are coming out and selectively raising money that will have to be done more.
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