Unwelcome news to depositors of Savings and term deposits in banks

State Bank of India, country’s largest lender announced the cut the interest rate on savings bank (SB) deposits up to Rs.1 lakh to 3.25 per cent from 3.50 per cent effective from November 1, 2019. The bank has also announced a reduction in interest rates on term deposits across select maturities. This has created panic on small depositors as other banks could also follow suit and cut their savings deposit rate.
The cut in deposit rates of the banks comes on the back of the Reserve Bank of India (RBI)’s 135 basis points reduction in the repo rate in the current year – the key interest rate at which RBI lends short-term funds to commercial banks. Concurrently Banks have been facing pressure on their spreads (yield on advances less cost of funds as they were obliged to reduce lending rates pursuant to the reduction in key policy rates this year. The pressure will only get heightened in the coming months, with the RBI’s mandate to link their new floating rate personal, retail loans and floating rate loans to MSMEs to an external benchmark, effective October 1.

The small depositors are feeling the heat of steep cuts in deposit as they are stuck with lower rates for long. Many of them including senior citizens who live on interest received from the bank deposit. With the current state of affairs of the economy, there is a danger of these small depositors may become victims of Ponzi schemes in anticipation of higher returns. The investments in share market or mutual funds are also not suitable for them as such investment may result in losses for any investor due to the poor performance of the market. The only thing which the depositors can do is waiting for the storm to calm. However, there is no end in sight to this disgusting situation.