Deposits with banks and small savings (popularly known as Post Office Schemes) are comparable.

There is a defined rate of return and maturity date. Liquidity also is defined, in case you need the money prior to maturity. These are the simplest of financial-investment products. However, there are certain nuances, which you should be aware of while making a comparison. The basic tenet of financial investments is SLR: safety, liquidity and returns. It is important to understand the order, since many people place returns over safety and liquidity.

Safety

Both bank deposits and small savings are safe, but you have to be aware of the finer aspects. In small savings viz. Post Office Schemes and Public Provident Fund, it is uniformly safe as the entire system is run by the Union government. Most banks are safe. However, there are shades.

There are public sector banks, where the majority (more than 50%) owner is the Union government. These banks are safe. Among private sector banks, there are the leading ones. These are safe by virtue of their fundamental quality. However, within private sector, there are the relatively smaller ones. You have to put up your antennae in such situations: while a small private sector bank may be safe, do not go by the lure of the rate offered. You have to be convinced about the fundamental quality as well. Then there are co-operative banks. It is here you have to put up your antennae fully. Cases of default have happened earlier, and future defaults cannot be ruled out. We do not mean to paint all co-operative banks with the same brush; there are the better ones as well. However, regulations of co-operative banks and their NPAs i.e. bad assets are different from banks.

One short-cut for checking out banks is whether they are part of Reserve Bank of India’s schedule, at https://www.rbi.org.in/commonperson/English/Scripts/BanksInIndia.aspx.

However, this is not a guarantee. Punjab and Maharashtra Co-operative Bank (PMC) was part of RBI’s schedule and was subject to RBI audit, but ran into issues. If you are looking for a guarantee, then there is deposit insurance of up to ₹5 lakh per bank. You can find out whether your bank is covered under Deposit Insurance Credit Guarantee Corporation at https://www.dicgc.org.in/FD_ListOfInsuredBanks.html.

Liquidity

Coming to liquidity, bank deposits are fairly uniform: you can withdraw anytime, but there would be a premature withdrawal penalty. Moreover, the interest rate is the relevant rate for the time period you have been there, and not for the initially-contracted period. In small savings, it varies from product to product. Certain products carry a lock-in period. Recurring deposit can be closed after three years, time deposit can be closed after six months, Monthly Income Account (MIS) can be closed after five years, Public Provident Fund has withdrawal rules, National Savings Certificate can be closed after five years and Kisan Vikas Patra after 2.5 years. While subscribing to any mall savings product, you have to take care of lock-in period, if any. You can check it at https://www.indiapost.gov.in/Financial/pages/content/post-office-saving-schemes.aspx.

Returns

For banks, you can check the website of the particular lender. If you have compounding options e.g. quarterly over annual, it adds to returns.

The level of interest rate indicates the risk level. For example, if the leading PSU bank offers, say, 7% and a relatively small co-operative bank offers, say, 9%, it is a message. This is not to say the bank offering 9% will default, but there is a differential risk level which you have to be mindful of. In small savings, it varies from product to product. You may check the rates at https://www.indiapost.gov.in/Financial/pages/content/post-office-saving-schemes.aspx.

It is announced by the Centre for every quarter. On June 30, the rates for July 1 to September 30 were announced. For 1-year time deposit, the rate was raised from 6.8% to 6.9; for 5-year RD from 6.2% to 6.5%. Other rates were unchanged. On September 29, rates for the quarter October 1 to December 31 were announced; for 5-year RD, the rate has been raised to 6.7% from 6.5%.

Conclusion

In small savings, quality is sovereign and interest rates are decent. In Senior Citizen Savings Scheme, it is 8.2%, in National Savings Certificate it is 7.7%, in Kisan Vikas Patra it is 7.5%.

In banks, you may get similar or even better rates. You have to be mindful of the bank you are looking at: and if it is a leading PSU, private sector bank, or a small co-operative bank.

(The writer is a corporate trainer and author)

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