For several months now, the signals emanating from North Block and the Reserve Bank of India have been loud and clear about the inevitability of hardening interest rates. Now bankers are beginning to hint at the need to raise deposit rates given the declining growth in deposits, especially time deposits. The argument goes that to raise liquidity levels for eventual lending to the economy, banks need to mobilise more deposits, and so an upward revision in their interest rates, which have stayed constant for quite a while, is in order. Also, with inflation eroding the value of fixed-return savings and higher-return alternatives such as gold and real estate becoming more attractive, banks may be witnessing a decline in long-term deposits. If credit demand rises in the coming months, liquidity may come under pressure; and the unstated message is that interest incomes may take a hit.
At one level, this wish to attract depositors with higher interest rates is only to be expected; banks function as a storehouse of value for savers. But they also function as facilitators of transactions between economic stakeholders, creating value for both consumers and producers. The business of banks is financial inclusion, not just by attracting new savers through higher rates but also by stimulating transactions between an increasing number of people through newer personalised services and products. Increasingly, this area of business has become an important source of revenues for banks; a 2004 study of American banks found non-interest incomes accounted for 47 per cent of operating incomes in 2003 as against just 29 per cent in 1986. Private banks have been quick to realise that financial inclusion does not end with opening new accounts but means providing newer fee-based products and services. Fee-based services are on offer by most public sector banks but evidence suggests the private ones have stolen a march by adopting new ways of banking that involve direct services and products tailored to customers' expectations, such as wealth management — in a word, they engage in relationship-building. All banks undoubtedly benefit from rising interest rates; in the high noon of 2006-07, when GDP growth clocked 9.4 per cent, private banks' interest incomes rose 44 per cent, against 18 per cent of public sector banks; but their fee-based incomes also expanded significantly.
As India readies for the next round of nine per cent growth, PSBs must wean themselves away from the automatic gains of a high interest rate regime and generate more fee-based services that benefit everyone. Hopefully, that would ease some of the pressure for higher interest rates and make financial inclusion more meaningful.
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