‘Interest’ of Bank Depositors in Chaos

For Savings Bank (SB) deposits and Term deposits, amounting to Rs 60 lakh crore, though interest is computed on a per annum basis, Reserve Bank of India (RBI) has allowed banks to pay such interests to depositors only at quarterly or longer rests. Most of the banks are paying interest on the SB deposits at an interval of six months. In case of Term deposits, banks are usually paying interest at quarterly intervals. As against deposit products, for loans taken from the banks, the interest is computed monthly. In other words, if a borrower defers payment of interest by two months, the banks charge two months’ interest on the delayed interest payment. RBI has deregulated rates of interest on Term deposits, SB deposits and loan accounts. However, RBI still regulates the interest application frequency on such products. While doing so, the regulator provides no rationale on why interest application frequencies on deposit accounts are different from those for loan accounts which is to the benefit of the banks and detrimental to the interest of the borrowers and, more so, depositors. RBI has a responsibility to prevent any bias or lack of standards/transparency in interest application frequency, which is detrimental to the interests of the depositors. In view of Section 35A of the BR Act, 1949, one would like to understand RBI's rationale for deferment of its decision, for over a decade, to bring parity across deposit and loan products offered by banks. Such a delayed decision, by RBI, is at an expense of more than Rs 200 crore of depositors’ money every month. Another issue of significance is the tax deduction at source (TDS) on interest accrued on Term deposit accounts. It is highlighted that there is no harmony in the TDS procedure followed by banks on interest accrued, which has its impact on net returns. Within the present tax laws, this paper shows how procedures can be rationally harmonized in the interest of, not only the depositors but also, the exchequer and the banks. It is time that RBI comes out with meaningful responses on the vital question of interest application frequency raised as early as April 2007 and later again in 2011. While trying to ensure that the depositors’ returns are protected, we initiate a discussion under the premise that banks are for-profit companies and have the privilege of a banking licence for a social (in addition to a commercial) cause. Through this paper we attempt to reiterate the depositor’s concerns and highlight the skewed benefits that the bankers may be enjoying at the expense of the depositors. Furthermore, we show how additional interest income to the tune of Rs 600 crore can be generated annually in the country through effecting proper TDS procedures on accrued interest