P. Devarajan

IT is hard to believe that the Rakesh Mohan report on interest rates on savings schemes will be significantly different from that of the Expert Committee to review the system of administered interest rates and other related issues, headed by Dr Y.V. Reddy.

Incidentally, Dr Rakesh Mohan was one of the members of the committee. The Reddy Report submitted in September 2001 generally argued in favour of linking interest rates on various government-run small savings schemes to the market.

Also, it was not in favour of liberal tax treatments as long-term financial savings of households do not attract the taxman at all the three stages: contribution, accumulation and withdrawals. A government spokesman has ruled out a drop in interest rates and is awaiting the Dr Rakesh Mohan report before finally making up its mind.

There is no denying the fiscal burden involved in paying out returns on savings schemes with a market disconnect and over the last two years the government did use the scissors on interest rates rather brutally with the interest rate on savings deposits cut from 4 per cent to 3.5 per cent.

For the retired and the elders, these schemes act as social insurance nets and it is time the government stopped hurting them as the interest burden has to borne by the society. The above-60 population depend on their PF, gratuity and pensions collections and place them in government savings schemes as they are the safest bet. With yields in the money markets expected to harden on the back of a near 5 per cent inflation in the next six months, there may not be any lawyers to argue the case for lowering returns.

The WPI inflation rate is a piece of elaborate fiction, with the services sector, accounting for more than 50 per cent of GDP, not being represented. The Finance Ministry, RBI and the financial system, for long, have looked at one part of the equation - interest rate on savings - and not taken the same trouble over the other part the equation - the lending rates charged by banks.

An example. A month ago, my friend, N.K. Kurup, went to a nationalised bank for a personal loan of Rs 50,000 to buy a computer. He has dropped the idea of owning a computer as the loan carries an interest tag of 13 per cent, apart from collaterals. Bank lending rates are out of alignment with market trends and some of the best corporates today have snapped ties with the banking system. External commercial borrowings are cheaper and they prefer to raise monies outside the country.

Should not the Finance Ministry or the RBI appoint a high-level committee to study bank lending rates or is it indecent to even raise the query?

By RBI's own admission, lending rates continue to be sticky. At one time, banks complained over a stiff wage bill pushing up lending rates and the government obliged by okaying the first round of VRS. New Delhi has cleared restructuring packages for the steel and textiles industries and allowed banks to raise foreign loans to fund them. Is there any such package available for the dying farmers in Andhra Pradesh and Karnataka?

There is a Corporate Debt Restructuring (CDR) in place and run by banks. There is nothing similar for the farming community.

Or is it the case of bankers that they do not want to lend money to agriculture and the services sectors?

Why is it that bank trade unions, specially officers unions, ever ready to go on a strike, are not bothered about this asymmetry?

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