Small-savings inflows are down to a trickle

Growth in collections in post office small-savings schemes is set to touch a low in FY21, going by the Revised Estimates in the Budget documents.

The collections are pegged at ₹8.7-lakh crore, up just 3 per cent over FY20. This pales when compared to the strong double-digit growth in the last few years. This is the lowest growth in the last decade, barring FY12, when collections dipped by 19% y-o-y.

At that time, investor interest had shifted to bank deposits, thanks to the 9-9.25 per cent returns offered on bank deposits then. FY12, thus, saw a robust 13.8 per cent growth in bank deposits (over FY11) at the cost of small savings schemes. Investors scouted for better rates in FY16 again, when collections in small-savings schemes jumped by a whopping 46 per cent y-o-y, the best show in the last decade. While equity markets remained lacklustre and bank deposits offered just 7-7.5 per cent then, small-savings schemes were the best option, given the 8.4-9.3 per cent returns. Bank deposit growth in this period was subdued at 8.6 per cent. This year (FY21), the prevailing low interest rate environment for fixed-income instruments and the dream run in the equity markets have been the main reasons for the waning interest in small savings.

Interest rates on the small-savings schemes were slashed by 70-140 basis points (bps) at the beginning of the fiscal over the rates that prevailed in the last quarter of 2019-20. For instance, returns on Public Provident Fund (PPF) came down to 7.1 per cent against 7.9 per cent. The interest rate on National Savings Certificate was slashed by 110 bps to 6.8 per cent.

While rates have stayed put since then, their sharp drop, coupled with low bank deposit rates, seem to have nudged retail investors to move to riskier assets such as equities. This trend is reflected, for example, in the number of demat accounts opened in the last few months. CDSL breached the 3-crore mark in demat accounts in January 2021, having taken just a year to add another crore (touched two crore in January 2020). To put it in perspective, CDSL crossed the one-crore demat accounts mark in August 2015 and took nearly four-and-a-half years to add another crore.