FinMin: Cut FD rates for senior citizens

State-run banks asked to submit action taken report, RBI has not prescribed any interest upper limit on fixed deposits

The finance ministry has asked government banks to reduce the fixed deposit (FD) rate offered to senior citizens to reduce cost of funds. At present, most public sector banks offer 50 basis points more to senior citizens than what they offer to others. Some private sector banks, like ICICI Bank, offer 75 basis points more to seniors.

The finance ministry has demanded an action-taken report from banks on how they have progressed on this front.

Some public sector lenders, which were offering 75 basis points extra to senior citizens, have now reduced it and are offering 50 basis points.

Public sector banks, however, are reluctant to cut the deposit rate for senior citizens, particularly at a time when deposit growth has been sluggish. Deposit growth in the last few years has been lower than credit growth, leading to widening of asset liability gap. In the current financial year, deposit growth was 13.3 per cent year-on-year, till January 11, compared with 16.7 per cent of the previous year. Credit growth during the same period is 16.3 per cent, compared with 16.5 per cent of the same period of the previous year.
 

RATE RATIONALE

• At present, most public sector banks offer 50 basis points more to senior citizens than what they offer to others
• Public sector banks are reluctant to cut the deposit rate for seniors, at a time when deposit growth has been sluggish
• Finance ministry is of the view that lowering fixed deposit rates for senior citizens will help banks to reduce the cost of funds, which in turn will enable them to reduce lending rates
• Banks say only a small part of their deposits are from senior citizens; hence, the impact on their cost of funds will be negligible

The Reserve Bank of India (RBI) has also expressed concern over the wedge between credit and deposit growth.

RBI projects 15 per cent credit growth for the current financial year, while loans are expected to grow by 16 per cent.

The finance ministry is of the view that lowering FD rates for senior citizens will help banks to reduce the cost of funds, which in turn will enable them to reduce the lending rates.

Banks, however, said only a small part of their deposits are from senior citizens, and, hence, the impact on their cost of funds will be negligible.

RBI norms have, however, encouraged banks to give higher interest on fixed deposits to senior citizens, though the central bank has not prescribed any upper limit. However, for retired bankers, banks can pay 100 basis points more than what they pay to ordinary citizens.

“In the case of domestic deposits, it will be in order for banks to give their resident Indian retired staff, who are senior citizens, the benefit of higher interest rates as admissible to senior citizens over and above the additional interest of not exceeding one per cent payable to them by virtue of their being retired members of the banks’ staff,” the master circular of RBI on interest rates on rupee deposit said.