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ET

Public sector banks in India are a symbol of security and trust. With the support of government,

these banks have evoked for generations a sense of assurance among borrowers when they

deposit their hard-earned monies. Be it products or new initiatives, public sector banks have been

at the forefront. Take for instance, the recent government's decision to announce an 'All Women

Bank' in public sector, which was cheered by all and sundry. This new public sector bank is

expected to add to the enriching experience of the customers by offering more customised

solutions catering to varying needs. Such focus on new products and new initiatives however, is

not new to the public sector banks. And on important occasions, these banks have laid the

foundations for framework on how to function smoothly for its peers in the private sector.

The recent instance of the State Bank of India offering fixed deposit for seven days drives

home the point of how public sector banks are constantly innovating and researching to secure

newer borrowers and customers. For both corporates and individuals it presented a lucrative

option to park their money at attractive rate of interest with no default risk. These fixed deposits

are as lucrative as the ultra short-term bond funds and liquid funds since the possibility of a tax

arbitrage will go away from June 1. The reason being interest on fixed deposits is taxed at

marginal rate of tax of the individual, while the dividends declared on these debt funds will be

taxed at 28.33%, according to the recent budget proposals.

Public sector banks also offer five-year tax saving fixed deposit. This is a lucrative investment

option for individuals finding ways to save income tax under section 80C. For example, the

Union Tax Saver fixed deposit offers 9% rate of interest. This scores much better than 8.6%

offered by National Saving Certificate and 6% offered by tax saving mutual funds in the last five

years. Instead of buying a complicated product in a hurry in the last few days of the financial

year to save on income tax, it pays to invest in a bank tax saving deposit. As interest rates are

expected to go down from present levels over the next one year, such possibility makes it all the

more interesting for investors to lock-in their monies in long term fixed deposits believe

experts. Tax saving fixed deposits, thus offer twin benefits - high interest rates and tax saving

below one roof. For customers with penchant for risk, public sector banks have been offering

various third party products such as mutual funds, insurance and online stock broking too. These

banks also offer Public Provident Fund and New Pension Scheme for all their customers in a big

way.

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Public sector banks including State Bank of India have made some aggressive moves in the

retail lending business too. In recent times, public sector banks have been prompt enough to

slash their interest rates. This augured well for borrowers and many a borrower have switched

their home loans accordingly. The Reserve Bank of India's directive of banning pre-

payment charges on floating rate home loans too have also led to borrowers shifting their home

loans. SBI has waived off the guarantor when an existing home loan with another lender comes

for re-financing to SBI. This is a big positive that attracts many existing home loan borrowers to

SBI. As interest rates are expected to fall in the next six months, public sector banks are expected

to get good business of balance transfer of existing home loans. Public sector banks have been

taking steps in the right direction to attract existing and new home loan borrowers with good

credit profile. Borrowers with high CIBIL score have been given incentives by offering some

discounts on processing fees. This retailfocussed strategy is expected to bring in expansion in

asset book without much compromise on the asset quality.

While individuals make the most of their investment portfolios by banking on public sector

banks, corporate customers too are benefiting by the various services launched by these banks.

Paying taxes such as income tax have been a big logistical exercise for most corporate entities,

especially the small-and-mediumsized businesses. However, now things have changed. Many

public sector banks offer the facility to pay income tax at their branch and also on their portals

using Internet banking. This has created a win-win situation for all three stakeholders - tax-

payers, government and the banks.

Public sector banks have taken proactive steps in commercial lending too. Dedicated branches

and specially trained sales force is deployed to cater to credit needs of corporations and

individuals. Branches catering to SME credit have become credit-counselling centres for the first

generation entrepreneurs. Banks have taken steps to ensure that loans are serviced on time. There

are conscious efforts taken by public sector banks to bring sick business units to life.

In these times of economic slowdown Public Sector banks are doing their best to improve their

loan books - both in terms of quality and quantity. A cut in Repo rate is expected to boost the

economic activity and should work in favour of public sector banks. The large bank network

comprising around 80,000 branches has been a big advantage public sector banks have in the

Indian banking industry. Due to such wide network and presence, experts believe that public

sector banks would play a vital role in achieving the mission of financial inclusion. They have

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already become the change agent in this process as UIDAI card - Aadhar- is given to all Indians.

In the coming years, these banks would continue to be a strong force in India's economic growth

as they continue to innovate and introduce new products to secure newer customers.

What is inflation?

Investors should be aware of the impact of inflation on their savings before deciding on

investment options provided by various agencies. Here's a low-down on what constitutes

inflation

A CORRESPONDENT

Inflation refers to the economic condition characterized by a large and sudden increase in the

prices of goods and services. People are concerned about the prices of goods and services that

they consume. So it has become a common practice to measure inflation as the annual percentage

change in the Consumer Price Index (CPI) which is just a measure of the average price of a

standard basket of goods and services consumed.

WHAT CAUSES INFLATION?

Several types of inflation have been identified depending on their underlying causes:

Cost-push: A type of inflation characterized by the rise in prices resulting from increase in the

cost of production without increases in output. Examples of this would be hikes in international

oil prices, higher cost of capital, higher interest rate,etc.

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Demand-pull: This is the kind of inflation caused by higher demand compared to the

available supply of goods and services. Usually, when people, business or the government

receive more income etc, the overall demand for goods and services may increase. This would

lead to increased prices, assuming the supply of goods and services is not able to adjust quickly

enough to meet the higher demand.

Structural: A type of persistent inflation caused by deficiencies in certain conditions in the

economy such as a backward agricultural sector that is unable to respond to people's increased

demand for food, inefficient distribution and storage facilities leading to artificial shortages of

goods, and production of some goods controlled by some people.

WHAT IS THE IMPACT OF INFLATION? > The impact of increase in prices is a decline in

the purchasing power. Thus, inflation means that households with a fixed income can buy a

smaller amount of goods and services. Mostly these tend to be low- income households while

higher-income households have more flexibility to neutralize inflation by investing in assets that

hold their value against inflation. > The savings pattern may also be affected. With the declining

value of money, people would be more inclined to spend than save anticipating that their money

can buy even less in the future. > Inflation can also erode the external competitiveness of

domestic products if it leads to higher production costs such as wage increases, higher interest

rate and currency depreciation. > High inflation countries tend to have high interest rates because

market participants in countries with high inflation rates tend, if the inflation is persistent, to

expect high inflation. Since contracted real interest rates do not differ a lot between countries,

countries with high expected rates of inflation will tend to have higher nominal interest rates than

countries with low expected inflation. > Inflation is a tax on money The government prints

money and spends it in the economy for the purchase of the goods (labour services, supplies,

etc.) it needs to produce the services it supplies to the public. When the amount of money it

prints is in excess of the quantity that will maintain the price level constant, there will be

inflation. In fact, the inflation will be in proportion to the excess increase in the money supply.

The public has given up goods (labour, supplies, etc.) to the government in return for newly

issued currency. But the price level rises proportionally with this additional currency in

circulation so that the real money stock remains unchanged and the real value of the addition

to currency holdings is zero. The real quantity of money is unaffected by the nominal monetary

expansion because the price level rises in proportion to the increase in the money supply.

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WHAT'S THE NATURE OF INFLATION IN INDIA?

In India we have a combination of both cost push and demand pull. For instance, the high

growth in onion prices was an instance of demand pull inflation, when the shortage of onions in

the market took the prices to new heights. Also, prices go up when there is a hike in prices of

petroleum products. Price rise here is due to cost push factors. This is because petroleum is a

vital input in many manufactured items and as an essential fuel for road transport, it adds to the

transportation costs and so prices in general tend to rise.

WHY DO WE FEEL THE PINCH OF RISING PRICES DESPITE LOW INFLATION?

While the inflation figures that the government publishes every week are rate of change in

wholesale price index (WPI) representing rate of increase in the wholesale prices of products,

what matters to us as individual buyers is the consumer price. Though prices in the wholesale

market have grown at a slow pace (at about 2-3 per cent), comparatively consumer prices

(measured in terms of CPI) have grown at a much faster pace (about 8-9 per cent). Hence the

pinch.

WHY IS THERE SUCH A DIFFERENCE BETWEEN WHOLESALE PRICES AND

CONSUMER PRICES?

A substantial portion of the differential is accounted for by the retailers' margin which are built

into what the consumer pays. The way the two indices are calculated differs both in terms of

weightage assigned to products as well as the kind of items included in the basket of products.

WHY DOESN'T THE GOVT PUBLISH THE TREND IN CONSUMER PRICES?

While wholesale prices are more or less the same throughout the country, consumer prices or

retail prices vary across regions and also across cities according to the consumer preferences for

certain products, supplies and purchasing power. Besides, taxes levied by states comprise an

important component of the variation in prices of many products. Therefore, it is felt that it is

important to give a more representative picture that is true for the entire nation because of which

the government sticks to trends in wholesale prices when it talks of inflation.