Savings lose value due to inefficient banking system: Y V Reddy

Savings lose value due to inefficient banking system: Y V Reddy

Agency News

Kolkata, Aug 24: Former RBI Governor Y V Reddy today said inefficiency of the banking system is the primary reason due to which savers in India are earning less returns while the interest charged for the loans is high.

Delivering the lecture "Indian Economy: Asking the right questions" on the third anniversary of Bandhan Bank here, Reddy said the depositors were right in their perception that they were losing value by putting money in the banks.

"The depositors complain about negative returns on their bank deposits because the interest earned on one-year deposits is most of the time less than the inflation which means that they lose the real value of their savings over time," Reddy said and added that depositors whose income was taxable ended up losing even more.

The former RBI governor said inefficiency of the banking system was the primary reason and external constraints imposed by the government and the RBI on the banks were also responsible for the erosion of the real value of the deposits. Reddy said the inefficiency of the banking system was indicated by 'cost of intermediation' which was equivalent to the difference in the interest paid by the borrowers and the interest earned by the savers.

He said that this cost was highest in India and blamed the external constraints such as the obligation of the banks to deposit at least 19.5 per cent in government securities, high Cash Reserve Ratio (CRR) up to 4 per cent of deposits, and compulsory lending of up to 40 per cent to priority sector, for poor returns to depositors and high interest rates on bank loans.

He said while the obligation to invest such a high amount in government securities or pre-emption ensured that the government received support for its borrowing programme, the banks earned far less interest than they could do by lending. Reddy further said that public sector banks suffered more as they were required to meet the policy objectives of the government, in addition to commercial objectives.

Reddy said he was unaware that any other major country in the world imposed financial burden of this scale and intensity. He said the cost of intermediation could be lowered by reducing the statutory liquidity ratio that is necessary for 'prudential needs' only and added that CRR also needed to be reviewed. (UNI)