The banks are feeling the heat of growing financial literacy in India. The RBI Governor Mr. Shaktikanta Das has recently said that the growing flow of money into mutual funds, capital market and other financial assets are affecting the liquidity in banking system. But he chose not to say that the growing habit of parking money into financial assets is impacting the balance sheet of banks.
Till 2011, banks were enjoying your saving account deposit free of cost. There was no interest on saving account deposit. RBI Governor Duvvuri Subbarao brought banks to the table and asked them to share the booty. With certain provisions, the banks started paying interest on saving bank account deposits @4 percent per month. Please think of the fact the banks were earning more than 10 percent per annum from your money and were not sharing even a penny with you. This is called muftkhori. The financially illiterate and unsuspecting depositors of saving bank account were happy with their passbook without asking for any interest on their deposit. To the height of shamelessness, the banks didn’t pay even a single penny to saving account depositors when the call money rate was ay 19 percent in the year 1991. They didn’t foresee the consequences of slow but steady pace of financial literacy in India.
Adding salt to the injury of banks, came the funda of mutual fund SIP (Systematic Investment Plan). In the year 1993, Franklin Templeton Mutual fund launched the first SIP product. The banks, who were already injured with introduction of interest on saving account deposits by Duvvuri Subbarao in 1990, tried to counter SIP with recurring deposits. Union Bank Of India introduced Recurring Deposit with insurance facility but these proved in-vain. Now almost Rs. 20000 crore per month is flowing into SIP of mutual funds and recurring deposit accounts are facing liquidity famine.
As if this was not enough, the mutual fund AMC started offering liquid fund and overnight fund to the investors. These funds are the safest one and give you return for even a single day or even a single night. Liquid fund and Overnight funds invest predominantly into RBI Treasury Bills. Liquid Funds and Overnight Funds are as liquid as the money in bank account. The corporates who were getting zero interest at their deposit started parking their surplus with Liquid Fund and Overnight Funds robbing banks of their current account earnings.
“Education is the most powerful weapon which you can use to change the world”, said Nelson Mandela. This weapon has given an earning blow to the banks in India.
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