Lower interest rates, reduced incentives for agents seen as reasons

Government-backed small savings schemes appear to be losing favour with Indian savers. The net collections (deposits minus withdrawals) in the first three months (April-June) under the schemes have turned negative, even as term deposits with banks have grown.

The lower interest rate on such savings products is the key reason. Even after hiking the rate with effect from April 1, 2012, the difference between rate of interest on savings deposits with banks and government-backed schemes is around 40 basis points. The interest rate offered for senior citizens in some banks is higher than what post offices offer for the Senior Citizen Savings Scheme.

Government officials say that increasing the rate on par with other commercial banks is not easy, as it will affect borrowings by the States.

There are two other reasons for negative net collection of small savings. First, incentives to agents have been pruned. Second, there has been significant outflow from the now closed small saving scheme Kisan Vikas Patra (KVP).

“In fact it is difficult to estimate how much is still outstanding as the scheme was in operation since long and there’s little centralised data,” a Finance Ministry official said.

To get a fair idea of the overall small savings collections, the Centre is planning to ask all the post offices in the country to submit detailed outstandings in KVP. Once this data is obtained, there will be some clarity on the real small saving collection.

To make small savings popular, the rate of interest on small savings schemes has been aligned with government securities (G-Secs) of similar maturity with a spread of 25 basis points, but with two exceptions. At the same time, the maturity period for National Savings Certificates (NSCs) and Monthly Income Scheme have been reduced from six years to five years.

The annual ceiling on investment under Public Provident Fund (PPF) has been increased from Rs 70,000 to Rs 1 lakh. A new NSC instrument with maturity period of 10 years has been introduced. However, the problem is that a 10-year term deposit in a bank gives tax benefit but a 10-year NSC does not.


(This article was published on August 30, 2012)
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