The team of economists led by SBI Group Chief Economic Advisor Somy Kanti Ghosh said in the note that interest on deposits in banks increases the capital of the depositors. This is usually how it should be. But, at present this is not happening in the country.
SBI economists say that retail depositors are getting negative returns on deposits in banks. This means that despite getting interest, they are incurring losses. In such a situation, the government should reconsider the tax being levied on interest income.
The team of economists led by SBI Group Chief Economic Advisor Somy Kanti Ghosh said in the note that interest on deposits in banks increases the capital of the depositors. This is usually how it should be. But, at present this is not happening in the country. Therefore, if this tax exemption cannot be given to all depositors, then at least retired senior citizens must get the concession. Most retired senior citizens depend on interest for their expenses. In such a situation, it is not right to charge tax from them despite negative returns. At present, a total of Rs 102 lakh crore is deposited in the entire banking system.
Reducing interest rates, impact on depositors
As per the current rules, banks deduct TDS (tax deducted at source) for all depositors having interest income of more than Rs 40,000 annually in their accounts. In case of senior citizens, this limit is more than Rs 50,000. Economists say that the focus of the government and RBI is on economic growth at this time, while interest rates in the banking system are going down. If we look at the inflation rate, then the interest earned on bank deposits becomes negative at times. This is having an effect on the depositors.
Profit pressure on banks
The note said that the real rate of interest on deposits with banks has been negative for a long period. The central bank has made it clear that its primary goal is to help boost growth. Low banking interest rates are unlikely to rise in the near future due to the availability of adequate liquidity. It also said that due to the high liquidity in the system, there is a lot of pressure on the banks on profitability at this time.
Economists’ advice to the government
- Interest income limit should be raised at least for retired senior citizens.
- RBI should reconsider the rule prohibiting interest on the basis of age.
Increased competition among banks
According to one estimate, the cost of the core banking system is six per cent. This includes cost of deposits, negative carry on SLR (statutory liquidity ratio), cash reserve ratio (CRR) and return on assets. The reverse repo rate is 3.55 per cent. In this case, if provisioning cost is also added to the core funding cost, then the total cost comes to about 12 per cent. In the current era, banks are giving retail loans at less than seven per cent rate. Competition has increased in this.
