The Daily Fix: The SBI rate cut shows that the damage caused by demonetisation continues

The Big Story: Capricious state
The cascading ill-effects of the badly-conceived and even more badly-managed demonetisation continue to play out. In the latest episode, they have spiralled out to take a bite off the poor who put their money in banks.

On Monday, the State Bank of India, the country’s largest bank, announced that it was slashing interest rates on saving bank deposits below Rs 1 crore from 4% to 3.5%. Even after banks were permitted to decide their interest rates freely, they had so far stuck to 4% interest or above for saving accounts. The SBI has broken the floor with the move. Consequently, other banks are also expected to review the interest rates they offer to customers.

The SBI’s decision on Monday will affect the small depositors most. Ninety per cent of the SBI’s depositors have saving balances below Rs 1 crore. Among these, the poor are going to be worse off than the rest. The poor have limited capacity to move money to options which pay better returns, such as fixed deposits or mutual funds. So they are likely to live with the low interest rate-bearing saving accounts. In fact, fixed deposit interest rates too could now see a downward revision by some banks.

What does demonetisation have to do with the SBI’s decision? During demonetisation, people deposited cash and opened new saving accounts at unprecedented levels. The number of saving accounts in SBI increased by nearly 27.8 % between November 8, 2016 and March 31, 2017. The total money in saving accounts deposited by customers in the SBI shot up by more than Rs 3 lakh crore during 2016-17. That was a multi-year record.

Even after the limits imposed by the government on withdrawal of cash were removed, people did not withdraw all the money out. This saddled the bank with huge sums on which it had to pay 4% interest. When the bank tried to give loans and earn some interest against these huge deposits, it found there weren’t as many borrowers as it would have liked for healthy profit levels. The existing bad loans were already drying up the growth of fresh investments from private sector. When private sector increases investments in projects, it borrows more from banks. To make it worse, demonetisation took the wind out of many of the formal and informal sector trades, further diminishing the rate of growth in fresh investments. The government data now bears these facts out.