Circuit Breaker. Small savings schemes need a makeover

Experts puzzling over how to revive the dwindling savings rate of Indian households should pay attention to the stories circulating in the media after the collapse of PMC Bank. The stories are an eye-opener to the hardships faced by small depositors when dealing with India’s unfriendly banking system.

Asked why he didn’t bank with a safe public sector bank instead of a co-operative bank, a daily wage earner explained that PMC Bank was the only bank in his neighbourhood that worked for extended hours beyond 5 pm. This allowed him to deposit or withdraw money after he was done with the day’s work. A lady employed as domestic help explained that PMC Bank’s staff were friendly and were willing to interact in Marathi, while staff in most other banks were stuck on English.

Another Mumbai resident recounts how his domestic worker — who has been frozen out of her account at PMC Bank — has been running from pillar to post for the last 15 days, trying to open an alternative account at a PSB. Despite being a resident of Mumbai for 50 years with both an Aadhar and a ration card, the bank has been stonewalling her for her inability to provide fingerprint authentication.

These anecdotes go to show that contrary to popular perception, it is not greed for higher rates that often drives ordinary savers to choose risky options such as co-operative banks over safer alternatives. Proximity to one’s home, helpful staff and pragmatic working hours matter.

No risk appetite

In this context, some of the solutions being peddled to restore investor confidence after the PMC Bank debacle are impractical. When you earn subsistence wages and need to walk over hot coals to open a bank account, awareness campaigns that inform you that only ₹1 lakh of your savings are protected by deposit insurance are more panic-inducing than reassuring.

India’s national income statistics show that nominal per capita income hovers at ₹1.26 lakh for an individual. The Global Wealth Report 2019 by Credit Suisse estimated that the median wealth accumulated by an Indian adult is at a mere $3,042 (around ₹2.1 lakh). Asking folks with such low levels of savings to eschew assured return products for market-linked products is akin to a certain French queen asking peasants who couldn’t afford bread to eat cake.

Both anecdotes and data suggest that ordinary Indian households have an unmet need for simple savings products that offer complete capital protection with fixed returns, which can be accessed at convenient times in their neighbourhood.

Why small savings

With a few tweaks, the small savings schemes offered by India Post can fit the bill admirably.

Post office schemes directly channel the investments of small savers into the National Small Savings Fund, which is a direct conduit for Central government borrowings. These schemes thus represent one of the safest avenues in the economy, without the rigmarole of deposit insurance.

Convenient access for the small saver is a given too, as India Post with its 1.55 lakh branches offers extensive rural and semi-urban coverage that no bank can hold a candle to. As a known Central government entity, India Post automatically commands the confidence of even less literate depositors. With fixed interest payouts, investors don’t need to track bond or stock markets or do due diligence on balance sheets to gauge the safety of their money.

Needed, a revamp

But despite their obvious utility to the poor, post office schemes (now renamed national savings schemes) have suffered from benign neglect by policymakers with a shrinking basket of products, fewer tax breaks on returns and the archaic workings of the post offices making them unappealing to savers.

Revamping the national savings schemes on the following lines can greatly help revive their popularity.

One, though small savings schemes were initially envisaged as vehicles for long-term investors, most of them (except for PPF and Sukanya Samriddhi) are today available for less than five-year tenors. This needs to be remedied.

It is an irony that retail investors in India today cannot access long-term government bonds, while institutions such as banks, insurers and pension funds flock to them for safety. Rather than expecting small savers to jostle with these big boys in G-Sec auctions, it makes sense to offer more small savings schemes in the 10-, 15- and 20-year tenors. At the same time, convoluted conditions surrounding early exits need to be dismantled, as small savers have a high need for emergency liquidity.

Two, withdrawn tax breaks on interest receipts from many of these schemes need to be restored. While it makes sense for the Centre to levy tax on interest from Post Office Savings/Time Deposits to ensure a level playing field with bank deposits, there’s no reason why concessions cannot be extended to the Senior Citizens Savings Scheme or the Monthly Income Scheme, which cater to specific categories of investors. Cumulative options must be added to all schemes extending beyond five years, with inflation indexation benefits.

Three, while interest rates on most small savings schemes can mirror market interest rates to maintain a level playing field with banks, longer-term schemes targeted at specific sets of investors such as retirement savers (PPF) or SCSS (retirees) must transparently offer rates that are 1-2 percentage points above comparable G-Sec yields.

Four, to expedite its digital transformation, India Post must abandon its pretensions of becoming a Payments Bank and must transform into a purely deposit-taking entity with a friendly customer interface.

Ignore the pushback

Any such attempt to revive the small savings schemes will receive strong pushback on two counts.

One can expect stiff resistance from India’s banking lobby, which has always held that high interest rates on small savings schemes impede rate transmission. But this claim wears a little thin when one compares the size of deposit flows managed by banks to those garnered by the post office.

At the end of FY19, all the post office schemes put together managed about ₹9 lakh crore, whereas commercial banks were sitting pretty on deposits of ₹127 lakh crore. Both the low savings potential of folks who frequent post office schemes and statutory caps on investments (such as ₹1.5 lakh a year on PPF and ₹15 lakh for SCSS) will ensure that post office schemes don’t pose much of a threat to banks. Even if higher rates on schemes such as the PPF or SCSS do offer some competition, they are too small a sliver of the savings pie to make a material dent. At the end of FY19, the SCSS managed around ₹54,000 crore and the PPF around ₹73,000 crore.

There will also be criticism that allowing the National Small Savings Fund (NSSF) to bloat will peg up the off-balance sheet borrowings of the Central government.

But there’s really nothing wrong with the Centre relying more on the NSSF for borrowings, provided it makes transparent disclosures about this in its budget documents and doesn’t use it to dress up its deficit.

On the contrary, expanding the NSSF will solve two problems at one go. There will be less risk of the Centre crowding out private firms in the bond market when it goes on a borrowing binge. It will also be benefitting deserving retail savers with its borrowings, rather than fat-cat institutions.

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