Rich banks poor borrower

High interest rate regime is giving sleepless nights to the borrower; Loans getting expensive day by day be it home, auto, personal or corporate loan. The cost of capital has increased enormously and within past 12-15 months the rates has been adjusted at least 5 times by the cash-credit monitoring body.

Well the moment loans gets costlier the deposit rates also increases benefiting the depositors specially peoples who are depended on income of interest. But my apprehension is with the way interest income is treated under tax bracket. Tax on the interest is treated as per the depositors’ tax slabs and in turn the depositor gets merely 2-3% higher returns as compared to saving bank accounts.

A person, who is not employed in any of the government machinery, is practically making his living by his own efforts, as per my opinion he should be totally exempted from income tax, because the government system is not facilitating him in earning his livelihood, and all the infrastructure and service which one uses being a citizen, are getting taxed directly or indirectly. Whatever little one saves becomes the scapegoat of income tax and he is left with practically petty returns. If I’m asked to reform “Taxes on Interest” I would certainly give a waiver/exemption on deposits which are equal to annual income of the depositor as generally people have more liabilities in terms of loans and expenses as compared to deposits they have parked with the banks.

Rising interest rate somewhat balances of inflows and outflows of interest component but still there persists a gap between the amount parked as FDR’s and the loan outstanding, on top of it one is liable for the income tax on interest earned from the Deposits which further dents the balancing.

Financial institutes offering long term loan have practically discontinued fixed interest loan as they are not very sure about the cost of capital in the longer run and that’s the reason the only option the borrower is left is “Floating rate interest” which means that rate will be driven by cash-credit equation. Borrower taking a long term commitment is always in a double whammy; one side his cost of borrowing shoots up with rising interest rate and on the other side the deposit rates doesn’t adjusts to the increased deposit rates.

I’m not sure that whether the financial institutes provides floating rate deposits or not, but in normal case if one needs to avail the increased rates he needs to discontinue with the earlier deposit and initiate a newer one, But here the financial institutes play foul, they charge depositors with an penalty for this switchover . The monetary value of penalty reduces the effective ROI of the deposits and generally depositors hesitate for switchovers.

The decision makers of cash- credit policy should work towards abridging the gap and evolve a win-win situation for the depositors and financial institute. Is someone paying ear to this..!!!? Hope that it is getting heard by the decision makers…!!!

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