Small savings schemes may now get lower interest rate as banks prune interest rates in the wake of RBI repo rate cut.  Experts feel that interest rates on these needs to be rationalized. Banks also feel that high rates of interest on small savings run by the Government make fixed deposits uncompetitive. Small savings command rate ranging between 8.4-9.3 per cent, causing difficulty in reducing deposit and borrowing rates.

Small savings compete with banks, for household savings. Inflation has remained high most of the year affecting the real rate of return. With inflation under control, banks will be better placed to lower deposit rates and increase borrowing.

The small savings schemes include  National Small Savings Fund (NSSF), which includes Post Office savings account, Post Office time deposits ( 1,2,3 and 5 years), Post Office recurring deposits, Post Office monthly account, senior citizens savings scheme, National Savings Certificate ( VIII-Issue and IX-Issue), Public Provident Fund, Kisan Vikas Patra and Sukanya Samriddhi Account.

Review of the parameters for the small saving schemes in operation to make them more flexible and market linked and revising the interest rates annually will help.

According to the government data, while the outstanding balance under all National Savings Schemes and Saving Certificates in Post Office stood at over Rs 6,15,021.56 crore as on March 31, 2014, aggregate bank deposits were Rs 77,05,560 crore in the same period. The aggregate bank deposits stood at Rs 85,33,290 crore in 2014-15.

Lowering interest rates may impact small savings, and small savings is purely a rural phenomenon. Banks feel disadvantaged because of the high rates offered by the small savings scheme but I don’t think that is happening. Rationalisation is needed as there are schemes with no limits and the government is paying higher cost .If the rates are revised downwards, people investing in such schemes may get lured by dubious or ponzi schemes that promise to offer astronomical returns. However, financial inclusion is unlikely to be adversely impacted as it is behaviour driven and not rate driven.

This indicates that the government does not want people to save rather they want them to spend. The government wants the country to move towards consumer economy.  However, the working population does not want finance minister to intervene in interest rates at the level of employees’ provident fund.

The government has budgeted Rs 22,408 crore from small savings to meet its budget deficit. Also, reducing the rates significantly will not be easy as it may channelise the money into gold and real estate, leading to generation of black money. While the small savings schemes may give lower returns going forward, people would still have options to invest in tax-free bonds and corporate deposits which offer stable and higher rates

He added that those investing in these schemes need stability and predictability and corporate deposits fit into their needs.

IKIA Research

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