Negative interest rates on bank deposits. This is happening!

Can negative interest rates of the central banks lead to negative interest rates in bank deposits?

The deeper prospects of having long period of negative interest rate on the Central Bank's policy rate.

  Shubham Saxena
  B.Tech. IIT Dhanbad

Charging negative rates on bank deposits by public is fortunately not a common practice by now. This is a feature born out of a scenario of keeping negative policy rate by the central bank and a economy characterized by low-inflation and low growth tendencies over a long period of time.
Well, it is happening in some of the banks of Europe. Generally banks bears the impact of negative interest rates, but it can sometimes be passed on to the depositors if the banks find it hard to sustain with their margins. In Denmark, negative central bank rates have started to lead to some bank customers being charged a negative rate on their accounts. In Denmark, Danske Bank is doing that for large professional depositors with large deposits.Interestingly, Danske Banks have even charged negative interest rate for some short term loans!

Could it become a widespread practice with other banks in Europe and Japan?

Here is a thing to understand, why most European banks won't do it soon what Nordic banks have started doing- charging depositors with negative interest rate.

Sweden and Denmark have some particular reasons other than combating deflation and stimulating demand. Nordic countries are becoming almost completely cashless economies. The Central bank of Sweden, Riksbank don't want this practice to become absolute.

Even sellers of Sweden’s version of the Big Issue magazine - Situation Stockholm - are able to accept payment via debit or credit card. Sweden is the place where, if you use too much cash, banks call the police because they think you might be a terrorist or a criminal. Swedish banks have started removing cash ATM machines from rural areas,annoying old people and farmers. Credit Suisse says the rule of thumb in Scandinavia is: "If you have to pay in cash, something is wrong."

Therefore charging negative rates would push people to pull out some money and keep it in cash form. However it is unexpected to be done largely.

Another important reason is that recent ECB actions have led the currencies of Switzerland, Sweden and Denmark to appreciate strongly against Euro which has further deepened the deflationary tendency in these countries. So their central banks are forced to further cut down the rates to a higher negative value. Recently in 2016, Sweden further lowered rates. Pressure is also building on Denmark to cut down rates further.

Why Indian banks are reluctant to reduce their base rate even after 50 bps repo rate cut by RBI?

RBI in September 2015 in it's fourth bimonthly monetary policy review slashed repo rate by 50 bps while most banks cut their lending rates in the range of 20-40 bps, thereby not passing on the full benefit to the customers. What's holding the banks back?

 Shubham Saxena Grad. IIT Dhanbad

It is not exactly that banks don't want to cut their base rates, they really can't cut the base rates anymore. Let's see what is restraining them. RBI in September 2015 cut down repo rate by 50 bps while most banks cut their lending rates in the range of 20-40 bps, thereby not passing on the full benefit to the customers. RBI and government are alleging and compelling banks to pass on the full benefit of rate cut to the customers. The main reason cited for why banks are very reluctant to reduce lending rates is the high interest rates offered by the government on small saving schemes. These high rates purportedly makes it difficult for banks to reduce their deposit rates and consequently lending rates.

September 29, 2015: RBI Governor Raghuram Rajan announcing fourth bimonthly monetary policy review.
RBI cut down repo rate by 50 bps from 7.25% to 6.75% in a surprise outcome.

At present, small savings rates are linked to yields on government bonds of similar maturity. The rates are revised annually. Government pays a premium of 25-50 bps over and above average G-Sec yield. In falling interest rate regime, which we are currently witnessing, government may prefer to shield investors in small saving schemes from a volatile slide in interest by continuing linking the interest rates on schemes to G-Sec yields rather than repo rates or bank deposits. In falling interest rate cycle, small savings schemes become unattractive if they are linked to repo rate or bank deposit.

Just have a quick look at the interest rates provided on various small saving schemes like 

Post Office MIS:                      ~8.4% @5yr 
National Saving Certificate:      8.5% @5yr 
Post Office TDS:                       8.1%-8.5% @1,2,3,5 yr 
Post Office Saving Account:     ~4% (interest rate is tax free)
Senior Citizen Saving Scheme: ~9.2% @5yr. 

Further in most of the schemes the interest is tax free, no TDS. While currently, most banks in India are providing interest rate on FD below 8% and that is taxable too. 
It is obvious that if banks decrease their deposit rates, people will more frequently start mobilizing their funds into such schemes. This makes it very much difficult for banks to lower their base rates as it would badly effect their deposits and margin. The result is that banks are receiving less money in deposits and they don't want to lower their balanced interest margin between borrowing and lending.


Further, Indian government has floated ambitious programs like Make In India, smart cities, digital India in recent year. These would require over $400 billion (₹ 26 lakh crores) in next five years and 70% is likely to be debt financed. Going forward, the bulk finance will be catered to commercial banks that will put a considerable strain on balance sheet due to the mismatch between tenures of deposits and loans disbursed as infra and power loans have long gestation period. An increase in stressed loans is expected, however government and central bank, RBI have recently taken several steps to reduce NPA and stressed loans. It must me kept in mind that stressed loans, 10% as of Nov, 2015, has a significant impact on the outlook of the country's economy and banks, given by credit rating agencies. India's current credit outlook is 'stable' by Fitch. The outlook of most of the Indian banks on the IDRs (Issuer Default Ratings) is stable. Downgrade by even a notch would prove painful for the banking sector and subsequently for the economy.