03 November, 2011

Advantage Customer!

RBI has done it at last… freeing up the interest rates on Savings accounts and allowing the market to determine the rates. This is a very welcome move. Also, this corrects a historical wrong. If RBI ( which is an entity with zero risk ) borrows at 7.5% currently, it stands to reason that other banks ( which carry more risk than investing with RBI ) should pay a premium to that, while borrowing from customers. Hence, Savings bank rate should actually be higher than the reverse repo rates. But bank SB customers were getting 3.5%pa as interest all these years and it became 4% pa very recently. Current account holders were and are still getting nil returns, which again is unfair as the banks get to use the money and it is essentially free money for them. They are firing from someone else’s shoulder! Now RBI has corrected the anomaly, at least regarding savings account interest rates. It has allowed the banks to offer a standard interest rate till Rs.1 Lakh in the Savings account and a differential rates above Rs.1 Lakh, for various slabs, as determined by the bank. Some banks, who have huge amount of CASA ( Current account Savings Accounts ) deposits are crying hoarse that this will impact their profitability and hence they may have to charge higher rates for loans. What they are crying about actually is about loss of easy money, which was a low hanging fruit for them. They justify the low rates saying that they give various services. These days every service is charged – be it a cheque book, a signature verification etc. So, that rings hollow. Now, competitive pressures will ensure that the interest rates for Savings accounts will go up. Yes Bank has already announced 6% interest in their SB account. This is probably the shape of things to come. Some of the banks may not increase it to that level, but will still have to take it up, if they want to ensure that money stays in Savings Bank accounts. Even 6% they are paying is very low. As seen earlier, it is much lower than the interest RBI pays banks! So, banks have no reason to complain. A specious logic I have seen in the paper says that the higher interest rate in savings account will result in a small increase in the interest rate, amounting to just hundreds of rupees. But that is the money which belongs to the customers – so it does not matter if it is hundreds of rupees or it is less than Rs.10. My experience with my clients shows that people do have substantial sums of money in their savings accounts. For them, the difference will be in thousands of rupees, not just loose change. Now the moot point – do you need to change your bank, if your bank is unwilling to hike the interest rates. It appears that banks will not have too many options in a competitive landscape. It is debatable whether they will go all the way to 6%. But 5% seems very much possible. Once many banks first come to this level, the ones who are sitting on the fence will have no other option but to follow suit. So, you are bound to benefit in any case and there is no need to change banks for now. But if your banks is playing truant, you could always close the account itself, if it suits you and open with a more customer friendly bank… or you could simply open a new account in the customer friendly bank and keep most of the deposits in it. The main point is that banks can no longer take you, their customer, for a ride. Authored by Suresh Sadagopan ; Published in Moneycontrol.com on 2/11/2011

Legislation is no replacement for Financial Literacy

Visiting parks and gardens has always been a pleasurable & soothing experience – not to relieve my straining bladder as my initial description might have indicated. It gives immense happiness just to be amidst the greenery and the sublime serenity that these havens seem to exude. So, I suppose it’s settled why I visit parks… While we take the whole thing for granted, it takes enormous effort to create one. There are all kinds of plants – some that grow without any support and others like vines, which require support. All these plants would ofcourse require optimal dose of nutrients, water, sunshine and tending so that they grow & flourish. Also, there are pests and animals to take care of. In effect, quite a handful needs to be done to ensure that what is planted, grows. Our government has given the framework in the Financial Sector by way of legislations – for Equity/ MFs, Insurance, Micro finance, Banks etc. There has been quite a burst of activism among the various regulators, in the recent years. They are striving to create an environment where the investor will not get misled and get a good deal. This is a laudable objective. In some senses, it is working too. But, legislation alone is not a panacea that will cure all ills that the common investor is afflicted with. The missing links today are that the investor is not fully aware of the financial landscape, the products & services, does not have the knowledge to interpret the information that is presented to him and is unwilling to allocate enough time to study the offerings and make informed choices. That ofcourse opens out the field for manipulation from unscrupulous elements, who will lead them up the garden path and sell them some apple-sauce, which is entirely unsuited to them. Result – an aggrieved customer, who thinks that the financial landscape is crawling with crooks. Turncoats there are, like in any profession. And like everywhere, the good ones far outnumber the black sheep. The problem in this case was both knowledge and willingness to spend time, understand the offering and take an informed decision, instead of blindly signing at every cross-mark that have been so thoughtfully pre-printed! This is an aspect that seems to have eluded the regulators. An informed and engaged customer is far more likely to take correct decisions; time and effort needs to be put in that direction too. Legislation is not a silver bullet that will cure the system of all it’s ills. Legislation is rather just one of the important components, not the only one. The regulators have been neglecting this aspect and it is showing up… instead they tend to bring in more regulation and end up over-regulating the industry under their charge, wringing out the life-force from them in the process. People are getting fooled by pyramid schemes, they get sold wrong insurance products, are holding unsuitable MF schemes, get into risky financial products, have wrong asset allocation… many investors just go by what their friend or colleague has done or recommends, without understanding the suitability. Lots of them chase fads – currently it is gold, silver & property investments. Some of these can be attributed to greed. But the significant other problem is the lack of financial literacy. Legislation cannot solve this. Concerted effort is required to address this. It is easy to bring a law – just a committee of a few people can bring in a well-meaning piece of legislation. But, education/literacy takes time to percolate. Putting up a few pages is not tantamount to educating people, as some regulators tend to believe. Ofcourse, that part is easy and that’s why they do it. Financial illiteracy costs everyone a lot. It hurts the investor, the distributors, the financial service companies & the economy at large, as an investor who has a bad experience does not go back to that asset class. For instance, many who had invested in company FDs in the past and lost money, are still wary even though the landscape has undergone a seachange now. It hurts the investors as they are not participating in good products available today and the companies who are unable to get much money from this route, due to investor indifference. Finally, investors themselves need to take up the onus of educating themselves, as that is in their best interest. If they are spending their whole lives to financially secure their family, why not spend some time to educate themselves on finances, so that they may secure their bases. Makes sense, doesn’t it? That willingness will mean all the difference between a financially secure future and another filled with worries. Just like the park that needs a fence to secure it from animals & pesticides to keep the worms at bay, ensuring adequate water & manure is the role of a regulator. Using the ambience provided and growing up in glorious profusion is what the plant will have to do – that’s the investor’s job too. Like they say, the horse has to still drink, even if it is taken to the water. That applies to investors too. Authored by Suresh Sadagopan ; Published in The Economic Times on 3/11/2011