40 years ago...and now: Lowest returns, consistently popular

They have given you much fewer returns over the past 40 years compared to many asset classes; yet, bank fixed deposits (FDs) remain one of the most popular investment options. For, they are perceived to be safe, as cases of banks defaulting and investors losing their money are rare, unlike equities or gold where volatility has been the name of the game.

The interest rate on FDs hasn't changed much over the years. In 1973-74, the rate was in the range of six to 7.25 per cent; now it is eight-nine per cent. Over the same period, inflation has moved from around six to over 10 per cent, leaving little in the hands of the depositor.

As against this, BSE Sensex stocks have given anuual returns of 16.6 per cent over a 40-year period. In the case of gold, the return has been 12.3 per cent.

Fixed deposits
Even in terms of features, bank deposits have not seen much change. Earlier, banks offered rainbow deposits, which are FDs linked to savings bank accounts. When the money in your savings bank account crosses a certain limit, the excess funds move automatically to the FD, allowing you to earn more interest income. These deposits are now more popularly known as "Flexi" or "Sweep-in' deposits.

Delivery mechanism
The significant change has been on delivery. The days of serpentine queues in bank branches are gone. Thanks to technology, you can now open an FD or a recurring deposit from the comfort of your house or office. If earlier, staff of public sector banks grudgingly accepted your account opening form. Today they chase customers and conduct drives to open accounts. The increased competition from private sector banks has been a help for customers.

"Customers are getting a huge benefit due to technology. It has made banking more convenient and more transparent. Now, the regulator just gives signals and leaves it to banks to determine the interest rates,'' says Ashvin Parekh of Ashvin Parekh Advisory Services.

Introduction to new loans
The entry of private sector banks, also saw the introduction of different kinds of loans, such as car and two-wheeler loans, loans for consumer durables and personal loans for which you don't need a specific reason. From a situation where customers who got a bank loan considered themselves lucky, now we see banks chasing customers from the time they start working.

The interesting thing with loans is that banks are gradually moving to differential pricing. A customer with a good track record can hope to get better rates. The option always existed with banks, but in the absence of credit rating it was difficult differentiate customers.

The benchmark, BPLR (benchmark prime lending rate), was the reference rate and banks could offer either more or less than the BPLR, depending on the credit worthiness of the borrower. In 2010, RBI introduced the more transparent Base Rate, which also made transmission of policy rates easier. Now, banks cannot lend below the Base Rate.

Over the years, the interest spreads, the difference between the cost of funds and return on advances, has been narrowing. For banks in India, interest spreads are currently 3.5-4 per cent, as against around one per cent internationally, says Madan Sabnavis, chief economist, CARE Ratings. "Spreads in India are high because of high operating cost. When operational efficiency improves, spreads will come down, and that will in turn lead to lower lending rates. That is why interest rates abroad are much lower than in India,'' he says.