Currently, banks deduct tax at source while depositing interest income exceeding Rs 40,000 for all depositors, while tax is prescribed for senior citizens if income exceeds Rs 50,000 per annum. As the focus of policy has shifted to development, interest rates are going down in that system which stings the depositor.
“Clearly, the real rate of return on bank deposits has been negative for a significant period of time and with RBI making it abundantly clear that growth support is the primary goal, lower banking interest rates will soon move north. is unlikely as liquidity remains plentiful,” the note said.
That said, the current bullishness in financial markets is probably a break from the past as families can indulge in the self-fulfilling prophecy of a good return on their investment.
“Thus we believe, now is the opportune time to reconsider the taxation of interest on bank deposits or increase the exemption limit for senior citizens,” the note said.
RBI may also reconsider the regulation that does not allow banks to set interest rates according to age-wise demographics.
Meanwhile, the note also said that banks are currently facing “significant margin pressure” due to excess liquidity in the system.
A back-of-the-envelope estimate suggests that the banking system’s core funding cost which includes the cost of deposits, negative carry on SLR (statutory liquidity ratio) and CRR (cash reserve ratio), and return on assets is currently 6. . percent, while the reverse repo rate is 3.35 percent.
Additionally, if we add the cost of provisions to the core financing cost, the total cost comes to around 12 per cent, it said.
It may be noted that at present, banks are lending for less than 7 per cent for retail loans and have gone public with their preference for lending to high-end corporate borrowers, where lending rates are very competitive. .