Retail Depositors Earning Negative Returns, Say SBI Economists, Call For Taxation Review

Real rate of return on bank deposits has been negative for a sizeable period of time and, interest is unlikely to make a north bound movement anytime ," noted SBI economists

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New Delhi: The latest report from the country’s largest bank State Bank of India doesn’t augur well for retail depositors. According to the report, retail depositors are earning negative returns on their bank deposits, and hence, there is a need for reviewing taxes on interest earned, said SBI economists.

What is the state of retails deposits?

In the note, the SBI economist led by Soumya Kanti Ghosh pegged the overall retail deposits in the system at Rs 102 lakh crore. Calling out for taxation review, economists said that if not all the depositors, the review should be carried out for at least the deposits made by senior citizens who depend on the interest for their daily needs.

At present, banks deduct tax at source while crediting interest income of over Rs 40,000 for all depositors, while taxes for senior citizens is applicable if the income exceeds Rs 50,000 per year. As the policy focus has shifted to growth, the interest rates are going down in the system which pinches a depositor.

"Clearly, the real rate of return on bank deposits has been negative for a sizeable period of time and with RBI making it abundantly clear that supporting growth is the primary goal, the low banking rate of interest is unlikely to make a northbound movement anytime soon as liquidity continues to be plentiful," the note said. However, the current bull run in financial markets may have changed the situation with households likely to get into the bandwagon of self-fulfilling prophecy of a decent return on their investment.

"We thus believe, it is now the opportune time to revisit the taxation of interest on bank deposits, or at least increasing the threshold of exemption for senior citizens," the note said.

The economists asked for the RBI to relook at the regulation that does not allow interest rates of banks to be determined as per age-wise demographics, it said.’

 What are the conditions of the bank?

The note also revealed that banks are facing "significant margin pressures" at present because of the excess liquidity in the system, according to the news agency PTI.

A back-of-the-envelope estimate suggests that the core funding cost of the banking system that includes cost of deposits, negative carry on SLR (statutory liquidity ratio) and CRR (cash reserve ratio), and return on assets is currently at 6 per cent, while the reverse repo rate is at 3.35 per cent. Additionally, if we add the cost of provisions to the core funding cost, the total cost comes to around 12 per cent, it said.

The note pointed out that presently banks are lending for as low as under 7 per cent for retail loans and have been public with their preference to lend to highly-rated corporate borrowers, where the lending rates get very competitive.