Union Finance Minister Arun Jaitley's proposal in the Budget that the Life Insurance Corporation of India (LIC) will implement a scheme for senior citizens to provide assured pension, with a guaranteed return of eight percent per annum for 10 years, could spell negative news for state-run as well as private sector banks.
Currently, almost all the PSUs and private lenders offer interest rates up to 7.5 percent for senior citizens for different tenures.
For example, India's largest bank State Bank of India offers its best rate for senior citizens at 7.45 percent for deposits ranging from 456 days to less than two years. For five years to 10 years tenure, the bank offers a seven percent interest rate. Similarly, largest private sector lender ICICI Bank has a 7.50 percent interest rate for 390 days-to-two years, while it offers seven percent for five-to-10 years.
In contrast, the post office scheme offers 8.50 interest rate under the Senior Citizen Saving Scheme (SCSS).
Now, with the LIC also offering a higher interest rate than those provided by banks on deposits to senior citizens, banks may not be able to significantly lower their deposit rates from current levels or maybe they will have even consider raising rates to match with those by the post office and LIC.
Deposits in the banking system surged sharply after the note ban to Rs 105 lakh crore at end of December 23, 2016, up Rs 4 lakh crore from Rs 101 lakh crore as on September 30, 2016, reporting a year-over-year growth of 15 percent.
According to rating agency ICRA, deposit growth for FY2017 is estimated to drop to around 12 per cent, with the improvement in cash availability and the cuts in deposit rates amidst low credit pick-up.
At the same time, banks' credit growth collapsed to 5.3 percent YoY, with a decline in aggregate non-food credit to Rs 72.43 lakh crore as on December 23, 2016, from Rs 74.35 lakh crore as on September 30, 2016. Credit growth for FY2017 is likely to remain muted at 5-6 per cent as off-take remains low.
Meanwhile, foreign institutional investors (FIIs) pulled out a record $11.3 billion during the September to December quarter (Q3) of FY2017 from India's equity and the debt segments, driven primarily by rising US bond yields and the impact of the note ban which led to a risk-off sentiment in addition to year-end profit booking.
The record outflows compare with inflows of $6.9 billion in the June-August quarter of FY2017.