The Daily Fix: The SBI rate cut shows that the damage caused by demonetisation continues

The Big Story: Capricious state

The cascading ill-effects of the badly-conceived and even more badly-managed demonetisation continue to play out. In the latest episode, they have spiralled out to take a bite off the poor who put their money in banks.

On Monday, the State Bank of India, the country’s largest bank, announced that it was slashing interest rates on saving bank deposits below Rs 1 crore from 4% to 3.5%. Even after banks were permitted to decide their interest rates freely, they had so far stuck to 4% interest or above for saving accounts. The SBI has broken the floor with the move. Consequently, other banks are also expected to review the interest rates they offer to customers.

The SBI’s decision on Monday will affect the small depositors most. Ninety per cent of the SBI’s depositors have saving balances below Rs 1 crore. Among these, the poor are going to be worse off than the rest. The poor have limited capacity to move money to options which pay better returns, such as fixed deposits or mutual funds. So they are likely to live with the low interest rate-bearing saving accounts. In fact, fixed deposit interest rates too could now see a downward revision by some banks.

What does demonetisation have to do with the SBI’s decision? During demonetisation, people deposited cash and opened new saving accounts at unprecedented levels. The number of saving accounts in SBI increased by nearly 27.8 % between November 8, 2016 and March 31, 2017. The total money in saving accounts deposited by customers in the SBI shot up by more than Rs 3 lakh crore during 2016-17. That was a multi-year record.

Even after the limits imposed by the government on withdrawal of cash were removed, people did not withdraw all the money out. This saddled the bank with huge sums on which it had to pay 4% interest. When the bank tried to give loans and earn some interest against these huge deposits, it found there weren’t as many borrowers as it would have liked for healthy profit levels. The existing bad loans were already drying up the growth of fresh investments from private sector. When private sector increases investments in projects, it borrows more from banks. To make it worse, demonetisation took the wind out of many of the formal and informal sector trades, further diminishing the rate of growth in fresh investments. The government data now bears these facts out.

The SBI was left with little option but to reduce the interest rates at which it lends money, hoping to attract more borrowers. This it did in January. Consequently, to remain in better financial health, on Monday, it reduced the interest it pays out against saving account deposits.

The SBI has admitted to the fact that the fat deposits partially led to the move. It explained that the prevailing low inflation levels gives it leg room to reduce the rates. After all, what the customers earn on their money in saving accounts is the interest paid by the bank minus the inflation rate, which reduces the value of money. With inflation down, the bank could afford to reduce the interest.

But the inflation levels are low largely because of the deflated prices of food items, which is costing the farmers dear. That the economy could enter such a phase after demonetisation had been predicted by some economists.

The SBI has said that it could not instead have raised the lending rates as that would have meant costlier loans for farmers, home buyers and small and medium enterprises. While this is true, the blame must largely be attributed to the Union government for tightening the demonetisation noose around the banking sector when it was already being pulled down by the dead weight of bad loans on its balance sheets. In this episode of the demonetisation drama, the cost is going to be borne by the banked poor, including those the government enjoined to open Jan Dhan accounts.

On the other hand, however, the government can always look at the glass half full and defend itself saying it is better to earn 3.5% interest instead of none by keeping the money under your pillow.

While it is true that the Bharatiya Janata Party won Uttar Pradesh elections right after demonetisation, it is hard to ignore the data piling up now which points to the damage caused by the ban on Rs 1,000 and Rs 500 notes. The move caused India’s growth to grind to a halt: the growth during the fourth quarter, 2016-’17 was only 6.1% with sectors such as manufacturing and construction slowing down. Bank credit fell sharply and, most significantly, demonetisation led to widespread agrarian distress as the entire trade in agri-commodities shrunk and prices of the crops crashed.

The Big Scroll

1. In this three-part series, Tony Joseph explains why India launched a war on cash using demonetisation.
2. Demonetisation may have caused lasting damage to economy, says political economist Barbara Harriss-White.
3. From economic slowdown to farmers distress: The damage caused by demonetisation begins to hit home writes Shoaib Daniyal.
4. Nasbandi vs Notebandi: Amit Ahuja and Pradeep Chhibber explains why demonetisation did not produce an electoral upheaval for Narendra Modi

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Punditry

1. Why is the Reserve Bank of India not disclosing the amount from the surrendered notes? Have more than the issued amount of notes returned, asks Arun Kumar in the Indian Express.
2. India is an overwhelming presence in south Asia, and must do more to build trust, argues Meenakshi Ganguly in the Hindustan Times.
3. The idea that interest rates are the right way to tackle inflation in India needs a serious rethink, says Pulapre Balakrishnan in the Hindu.

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