HIGHER INTEREST RATE REGIME: IMPEDIMENT TO DEVELOPMENT

HIGHER INTEREST RATE REGIME:
IMPEDIMENT TO DEVELOPMENT


There is a relatively higher Interest Rate regime in India prevailing for a long time continuously and it is not being sustainable to run economic activity if it has to run in debt capital dependence. If the cost of capital is high, obviously it affects the economy everywhere with multiplier effect and the output of the economy is loaded with higher cost factors making it non-competitive globally. Let us see the Interest Rate regimes prevailing for about last 20 years internationally: 


USA INTEREST RATE REGIME 

( https://tradingeconomics.com/united-states/interest-rate )


EURO-AREA INTEREST RATE REGIME ( EUROPE )

(https://tradingeconomics.com/euro-area/interest-rate)


UK (UNITED KINGDOM) INTEREST RATE REGIME

(https://tradingeconomics.com/united-kingdom/interest-rate)


INDIA INTEREST RATE REGIME

                                                  (https://tradingeconomics.com/india/interest-rate)

The graphical representations shown above are from the same source hence are consistent data and no discrepancy for comparison. The rates shown in the graphs are the interest rate of the Central Banks of the concerned economic zones of the world. Beyond the Central Banks, there are Commercial Banks who are lenders to public and there is possibility of some rate addition or even subtraction. Some example of Subtraction are Denmark where, as on June 2020, the interest rate was -0.6% and Switzerland where the interest rate was -0.75%, which means the money kept in Banks would accrue negative interest rates (the amount will be charged a negative interest rate). We have to compare the interest rates of USA, Eurozone and UK with India for the fact that, besides our domestic funds, the external funds from these zones flow to India.

While the interest rates in USA, Europe and UK is 0.0% (Zero Percent), in India it is right now 4% at Central Bank (Reserve Bank of India) level. Accordingly, in India, the Depositors are paid interest on their deposits in the Banks whether as savings deposits or term deposits. And, the lending rates of the Banks are much higher which ranges from 7-10% approximately right now depending on the types of lending. The Banks keep a margin over the Central Bank Rate for lending towards cost of their business and eyeing profitability. For clarity, the interest rates all said above are per annum(per year).

The Penal Interest Rates charged by the Banks in India is to the tune of 24% per annum by some large or small sized private Banks, in case of unexpected exigencies of the borrowers and not being able to repay on time for some time, which is worst, than tyrant moneylenders of yester-years. This is being said by some banks or their representatives to be a contractual obligation of the borrowers, while most of the borrowers in India ( I am saying of common people ) would not even know that they have to pay 24% penal interest in case they have any unexpected exigency and not able to repay on time for some time, as the documentations would be done in such a manner that it would remain quite shadowed.  

The Banks are supposed to remain profitable but not become profit mongers by attitude by squeezing the public to the extent that it crosses the breaking limit. Some of the large private banks are in that motive in fact, not only in profit mongering but to show rosy results to enhance their market capitalization in stock market, to benefit a few investors at the large cost of the mass of public and they are always pushing the entire machinations to fetch their objective, may not be in the larger interest of the national economy of India.

It has been quite intriguing and a cause of worry to the general public in India while the Banks have been adamant to charge penal interest during a Moratorium of six months announced  by RBI for the borrowers during the Covid-19 pandemic and the lock down measures taken to contain its spread and the economic activities went through a grinding halt. In fact it is quite disturbing to observe that some banks are bent upon charging interest that can go to the extent of 34% (normal + compounding+ penal interest) to the borrowers, which would be just economic-killing of mass borrowers. The Hon’ble Supreme Court of India is hearing some cases on this and also the Government of India is working on this as per the news reports, it is hoped that some meaningful decision would be taken to fix the issue at the most reasonable level.  As the interest rate regime has been depositor oriented largely in India, it has remained at a much higher level compared to the other comparable zones of the world.

It is also unfairly taken for granted in India, that it is only the bankers or the managers of financial institutions or regulators (RBI) have the views that are all valid and whatever the other public would say and vouch for are of no value or little value or no consequence. The bankers or the managers of financial institutions or the regulators are in that profession, they can have their professional bias very strong to drive their point of view, however, others who are basically consumers and other stake holders and drivers of the economy, their views have a value, that can not be ignored for the economy to operate in a balance. 

The higher interest rate regime existing in India has not been conducive for the performance of the economy in general. The fear of Inflation with reduction in Interest rate can not be justified when the Economy has contracted by double digits, as much as -23.9% for Indian Economy during the quarter of April-June, 2020. The Higher Interest Rate Regime of India is impediment to performance of economy and development, needs to be recognized.
***


About the Author : Dr. Nimain Charan  Biswal is a B.Sc.(Agri. Science and Technology). M.B.A. and Ph.D.( Management Area ) by qualifications and he has 34+years of work experience in both  industrial and development sectors in diversified fields of social importance. He has been educated at Orissa University of Agriculture and Technology (OUAT)-Bhubaneswar, Institute of Rural Management Anand (IRMA) and Gujarat University (with Resource Support of IIM-Ahmedabad). Dr.Biswal is further educated at IIM-Calcutta, XLRI-Jamshedpur, Apple Computer Industries and Spar Inc., USA. He has worked for reputed National and International Organisations in Senior/Top Management Capacities. He is a management  expert, a prominent professional of India and known Internationally as well. He lives at Mumbai in India.


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