Treasury bonds for state banks to cover higher interest to senior citizens
The Treasury is planning to issue a bond to banks in a bid to compensate the losses incurred by them in increasing the deposit rates for senior citizens, highly placed sources say.
Last month’s budget proposed to offer a 12 per cent annual interest rate for deposits of pensioners and elders, who maintain their deposits in state banks. “The Treasury will issue a bond in favour of the banks which grant 12 per cent interest to senior citizens,” a source told the Business Times. Now the interest rate for senior citizens is at 6 to 6.5 per cent. “The 12 per cent interest is twice the current rate and it’s a huge cost to the banks,” the source said, adding that this has to be compensated by the government.
Meanwhile other private commercial banks are expected to increase their rates in a bid to follow suit. “This proposal is likely to be applicable only to senior citizens who currently maintain accounts with state banks. So there may not be a flight of deposits to state banks from the private sector banks,” a senior private sector banker told the Business Times. He said that details of how this budget proposal is to be implemented are still unclear.
“But if the proposal says it’s not related only to senior citizens who maintain accounts but applicable to new accounts by senior citizens at state banks, there could be a flight of deposits from private sector banks to government sector banks,” he said. Dharma Dheerasinghe, Chairman Commercial Bank told the Business Times that ultimately the private sector banks will also have to follow suit by increasing their rates. Another private sector bank CEO agreed saying that they will lose business if they do not increase the rates.
According to official data the total deposits of senior citizens in all banks is estimated at Rs. 90 billion.
| State banks to pay higher interest than finance cos. The proposal to increase to 12 per cent interest rates for senior citizens on deposits in state banks could impact on finance companies and goes against the grain of normal financial sector practices, financial industry sources said. “For example finance companies offer an interest rate of 11 per cent to deposits of senior citizens. Now if some banks are offering higher rates then that breaks the cardinal rule that finance companies pay higher rates than banks,” one source said.He said it could trigger an outflow of these deposits in finance companies to state banks and buckle the system, unless finance companies also increase their rates to over 12 per cent which has to be through a Central Bank directive. |