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Does new interest rate formula hit savings of 4.1 crore senior citizens of India?

Bankers and policy makers have adopted market-friendly external benchmark interest rates from October 1 to ensure instant changes for ordinary borrowers. But the new formula may hit the earnings of senior citizens through term deposit accounts in a low interest rate scenario, the SBI’s research note warns.

Senior citizens have more than four crore term deposit accounts with a deposited amount of around Rs 14 lakh crore, almost seven per cent of India’s GDP.

The current deposit rate of a senior citizen as part of Private Final Consumption Expenditure (PFCE) is only 5.5 per cent which will “further down if the interest rate drops”. “Given the declining interest rate scenario, this might go down and impact PFCE too,” the note by India’s largest bank said.

Experts, however, said that the impact would be nominal. “The argument that senior citizens will be hit is flawed. Even bank deposits are taxed. Senior Citizen Savings Scheme and Pradhanmantri Vaya Vandana Yojana are taxed, but most senior citizens have no other income, and thus, tax will not apply. Regardless, the total impact is tiny and can be offset by just one month of loans taken by people who will be happy to pay lower interest rates,” Deepak Shenoy, founder of Capitalmind, a Bangalore-based financial advisory firm told India Today.

The potential victims of the new interest formula may find some relief from the government as the SBI research suggested that the government should provide tax benefits on interest earnings for Senior Citizens Savings Scheme, a popular saving instrument.

Under this scheme, a senior citizen can deposit Rs 15 lakh with an 8.6 per cent interest rate. “It will be fair if such amount is given full tax rebate as the revenue foregone by the government could be only Rs 3,092 crore, that will have the minimal two basis points impact on government fiscal deficit,” the SBI note says.

From October 1, retail loans will be linked to external benchmarks instead of various internal benchmarks such as base rate or MCLR, which are based on marginal deposit funding cost. This means that all the new loans under the new formula would be priced based on RLLR (Repo Linked Lending Rate) only.

Bankers and policy makers are in panic over the economic slowdown and try to convince themselves that rate cut could help boost the economy. But growing household debt in the last four years suggesting rate cut is not an appropriate action in such a tough time. In the last four years, India’s household debt (as percentage of GDP) has increased from 9 per cent (Mar’15) to 11.7 per cent (Mar’19).

Limited options of social security, along with low-interest rate earnings on hard earned savings, are pushing senior citizens towards big trouble. Bankers and policy makers have to protect the interests of senior citizens along with the economy.


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