Most of the Governments of the world have been subsidised by the middle class. Let me explain.

The biggest borrower in India is the Government of India – about 80% let us say. Now this government along with the RBI can decide the interest rates for most of us. They decide:

at what rate PPF will pay you interest

what rate you will get on your Savings bank account (recently freed)

at what rate the GOI bonds will be issued

Is there any reason why they will pay you MORE than the minimum that they can pay? No.

Now the borrowers are the biggies like industrialists who will also like to pay the Minimum for any cost of production, fair enough.

Then there are builders who would like to build their land banks with bank funds! More Power to them.

Funny – the middle class saves in banks, banks lend to builders, builders jack up house prices. Middle class borrows from the SAME banks at rates far far higher than they get from banks. Why do banks need such high margins? Simply because Mr. Vijay Mallaya and his ilk do not repay even the principal. So banks lend to old age homes, hospitals, et al at 16% interest, while you get 8% on your fixed deposits. God bless the bankers. Shylock, Morgan, …all are the same.

So here the common man in his mad love for NOMINAL return of capital keeps his money in banks, post office and endowment policies of  life insurance companies. These moneys are invested in GoI bonds – so the government has a tap of funds, which even the RBI cannot control.

In this scenario if you get a return greater than WHOLESALE index, you should be surprised. If you get more than the Consumer Price Index, it will be an aberration.

When will this change? When we decide to remove the intermediary. Big corporates issue CPs – and raise money from the market bypassing the bank. Unfortunately it will still have to involve an intermediary – in this case the Mutual fund. However as the Mutual fund industry’s expenses are controlled by SEBI (and by competition) the returns that you get from a mutual fund is better than a bank. However we will resist change – and while giving all this gyan let me admit I also do leave large amounts in savings bank accounts….

So if you want a decent rate of interest see how to remove the intermediary called bank. Go to a mutual fund with decent YTM in their debt portfolio. For the more adventurous people you can try lending to businesses which will want funds and willing to borrow from you instead of the bank. Today I advised a company to take money from clients 3-4 years in advance giving them a 12% IRR discount, it works.

See what you can do to by pass the usurious lenders who want to pay you peanuts. Prove that you are not a monkey. High time we did it. However if a 65 year old came to me and said ‘Should I keep my money in……..Finance Ltd  at 10.5% p.a. interest or in SBI at 8% interest, I would still choose SBI.

Do not fool around unless you understand Risk and Return while taking a A+ borrower instead of a AAA borrower. If you do not, play safe.

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