The recent credit policy announced on April 29 will continue the policy of softening the interest rates. It will be welcomed by the corporate borrowers. But for many savers who contribute to the deposit resources of bank. Such a policy will not bring much cheer.

When Senior Citizens meet at the beach, market place, temples, social functions and elsewhere, they no longer talk about their comparative ill health and physical disabilities, their children and grand children in far off places, or about political economic and global issues. Invariably, their talks veer round the declining interest rates and how difficult they find to meet their monthly family expenses out of falling interest incomes.

Not all senior citizens are placed alike. There are retired central and state government employees who are getting pensions two to three times the salaries they were drawing at the time of their retirement. Having built or bought a flat or house while in service, pension amounts make them lead a reasonably comfortable life. This is true of many retired public sector employees too where pension schemes were put in place. Yet, there are many ex-PSU employees who doubt enjoy the pension benefit, as they retired before the scheme was introduced.

The luckiest among the senior citizens are the retired UN employees, who receive tax free pension of US $ 1000 - $ 3000 each month. Many of them are enjoying such pension for a decade and more. Limited in number, in rupee terms they were getting Rs.15,000 for $ 1000 in 1986, which became Rs.18,000 in 1990, Rs.25,000 in 1991 to grow gradually with every depreciation of the rupee against the US dollar in the last ten years to become Rs.47,000. Such UN pensioners have nothing to complain about and they are able to save painlessly a substantial part of their pension income to join the richy rich class. They are financially the most secure among the senior citizens.

It is the plight of the senior citizens who retired from private service with PF and/or gratuity terminal benefits that is heart sending. After meeting their family obligations out of the terminal benefits, they parked their savings in many instruments and institutions. There are many pathetic stories of citizens who lost much of their investments in finance firms, NBFCs and Nidhis / Benefit Funds, which folded up. They found the bank deposits safest, after their bitter experience with reasonable returns until a year ago. With interest rates on bank deposits moving southwards, those who live out of monthly interest income find the going rather difficult. They are the ones that are hit hardest by the falling interest rate.

What is driving the interest rate down? With the failure of many NBFCs and finance firm, there was a heavy inflow of deposits into the banking system. The high level of liquidity of the banking system has pushed the interest rates down, with the banks themselves struggling to deploy their huge funds.

Though the declining interest rates is the result of bulging deposits of banks, it appears to be a well-orchestered policy initiative to benefit two sectors. The Governments Central and States – with enormous appetite for funds for meeting their budget needs, have burdened themselves with huge debts and interest payments. It was believed, at the time of launching the economic reforms, that the governments would not be so indulgent with borrowed funds if they had to raise funds at market rates. In the pre-reform era, the statutory obligations of banks and financial institutions to invest in government securities for below the prevailing market rates affected their profitability. There was no discipline in the governments to deter them to borrow even at market rates. With interest obligations of the governments eating into their available revenue collections, they needed relief. The growing liquidity of the banking system paved the way for softening interest rates. Good for the governments they can reduce the interest burden on current borrowings and even their past borrowings with debt swaps. That is, converting high cost debts into low cost debts. The major beneficiary is undoubtedly the Governments.

The other beneficiary is the corporate sector. The lobby of the corporate sector has been representing to the authorities that in a globally emerging competitive environment, the high interest cost was affecting their competitive abilities. If they could access funds at a real interest rate of 5 per cent, like foreign companies, they could meet foreign competition effectively. The authorities found their logic convincing and with the Reserve Bank having given up its administered rates regime, permitted the banks to lend to corporate at their own freely determined interest rates, with the floor rates – Prime Lending Rates - to be made public. The result is that corporates are able to borrow now at rates far below what they paid in the past.

These and other related issues were discussed at a public meeting organized jointly by the Institute of Economic Education Rajaji Centre for Public affairs and Indian Liberal Group, Chennai Chapter in the first week of April in Chennai.

At the outset, it was emphasized that it was not impossible to reach a growth rate of 8 per cent, provided the level of savings was stepped up to 30 per cent of GDP. But the present climate of falling interest rates on the one hand and shrinking investment options were not conducive to raise the rate of savings.

Dr. T.K. Velayudham, former Economic Advisor, RBI and now Chairman IEE made a pertinent point that the Y V Reddy Committee which examined the Interest Rate Structure did not recommend reduction of interest rate for depositors, in the prevailing Indian context. He, therefore, suggested that the RBI and the Government should keep in kind this aspect, while deciding for steering towards reduction of interest rate for savers in the household sector. While he was in favour of administered interest rate he underlined the need to rationalize it, so that the household sector which contributed to national savings is amply rewarded.

Mr. S.P. Muthukrishnan, former DGM, Indian Overseas bank dwelt on the potential of savings in India in the days ahead. He preferred to take a tabular view of the overall prudence of savings under the prevailing economic situation, after taking into account the inflationary pressures surfacing. He dwelt on the weight carried by the India banking system in terms of cost escalation, which banks are not able to contain or control.

He came out with several suggestions.

1. Banks should strive to, as part of managing their spreads, improve their fee based income as well as manage their Non Performing Assets. The depositors should not be penalized with low interest rates to meet the cost of NPAs of banks.

2. The Sukhamoy Committee observed that the depositors should be able to earn 2 to 3 percent over and above the rate of inflation. With the wholesale price index crossing to percent, a nominal interest rate of 8 per cent on one year deposit would psychologically make savers to park more of their savings with banks.

3. Once interest rates are announced there should be no reduction within 12 months, but upward revision is permissible once in six months.

4. The extra interest rates now offered to NRIs should be withdrawn, as that will not materially the inflow of NRI deposits.

5. A differential interest rate scheme has to be introduced after segmenting the depositors with non-pensioners, widows etc who should be eligible for 1 per cent extra interest over the normal rates.

6. Bankers should take active steps to bring down their average cost of operations by all means.

Mr. R. Viswanathan, former Deputy Managing Director, SBI, however, looked at the prevailing declining interest rate regime from a different perspective. The low interest rates and excess liquidity of the banking system moved in tandem. Global experience showed nominal interest rates sliding to as low as 2 per cent, with low rate of inflation. It is difficult to arrive at and ideal interest rate which investors accept as a reasonable rate. He stressed the need to fix and peg the interest rate at a figure between the nominal rate and the real rate and benchmark it to inflation. The absence of social security system is not an argument to move away from a low interest rate regime.

Mr R Thiagarajan, Chairman, Shriram Group of Companies maintained that a low rate of interest regime is beneficial in the long run, as it would result in wealth creation by financing entrepreneurs. The investors have to look at various investments options available, though very limited at present, if not totally non-existent. The Central Government and the RBI should keep themselves away from regulating and administering the interest rates by allowing the market forces to decide the interest rates. The low interest rates were ideal for business ventures to create wealth, jobs and incomes and undertake risks, so as to earn a reasonable return on their investment.

Mr G Narayanaswamy, a leading Chartered Accountant said that there was an urgent need to review the interest rate structure in the Indian Context, without making vividious comparisons with the advanced countries, where a low rate interest regime could coexist with a well organized social security system. He felt that the present restructured UTI is a good and reliable avenue for savers to invest for a reasonable return.

Some of the senior citizens expressed the view that middle class investors who deposited their savings with banks were denied a fair return. They questioned the view that with the cost of NPAs high, banks had reduced the interest rates. The depositors should not be penalized for the inefficiency of banks in allowing their NPAs to bulge and make the depositors bear the cost.

A retired non-pensioner lamented that while an MP or MCA is eligible for pension even after serving one term after serving private companies for decades were not enjoying pension benefits.

The hardships experienced by many senior citizens are genuine and not exaggerated. Most of them do not have the social security provided by the joint family system. With their children employed in several parts of the world, some of them said with tears in their eyes, that they have very little financial or financial support from their children on whom they invested for their education. Nor do they have adequate monthly income from interest to be financially independent or secure.