ECONOMY & BANKING SECTOR MANAGEMENT THRU COVID TIMES

Not too long ago, in March 2020, pandemic fear coupled with economic?& social fallout of nationwide lockdown spooked the markets. Stock markets were in free fall. A run on the Indian Banks, already reeling under mounting NPAs, seemed imminent. Business failures, ?job & income losses triggered by one of the strictkest and extended Lockdowns meant that contagion of NPAs could spread like wildfire in the Banking Sector.

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Come December 2021 and March 2020 events look like a distant bad dream, the crisis has been admirably contained & managed, thanks to the efforts of FM ?Nirmala Sitharaman, RBI Governor Shaktikanta Das & the team. It helped that both of them enjoyed political backing. True, there has been immense pain along the way but ?much needed stability to banking system and financial markets has been restored.

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Low interest rate regime and easy credit availability seemed to have been the key policy intervention to achieve this turnaround. Growth seems to have been priortised over inflation moderation?& rightly so.

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As a result, real interest rates net of inflation, have largely been nil or negative. While this has helped businesses and banks, the common man has been hit hard, especially the Senior Citizens?& Retirees who depend a lot on interest income from Bank FDs. Bank Term Deposits, considered simple, safe & liquid compared to other investment alternatives, are preferred by them. Though it may be said, failure of banks would have been a ?much bigger calamity & a completely unacceptable outcome, and thus low interest regime is a lesser evil, a bitter pill to contain the contagion.

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That said there may be an argument in faour of addressing this pain. Higher interest rates (currently 7.4% per annum) on investment products like Senior Citizen Savings Scheme & LIC Prdhan Mantri Vaya Vandana Yojna are available to Senior Citizens with investment capped at Rs. 15 Lakhs each. The interest rate & max investement could be increased to say 8.5% per annum and 50 Lakhs respectively for individuals above 50 years, not just for Senior Citizens. Modi Govt. has been quick to respond to emerging issues and thus can & should address it. Other options like RBI Bonds, Post Office Saving scheme, Senior Citizen Bank FDs offer considerably lower interest rate. The effective real interest rate post tax is negative for most.

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Another option could be to offer Inflation indexed interest rate (say CPI + 3% Real Interest, on a rolling quarter basis) on term deposits to individuals. 100% term deposits by Senior Citizens and 50% of term deposits by other individuals could be extended this benefit. Modalities for this could be easily worked out. There could be many other ways to address this issue, provided the Govt. is convinced to address it in first place.

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FM has started her pre-budget consultations with stake holders from trade, industry; and experts. Thus now is the time to pitch for this. I see that there is an “All India Bank Account Holders Association”, appeal to them to take up this issue with FM & RBI Governor.?