The sudden surge of small savings in 2008-09, with inflows rising up by 16.2% as against the 10-20% fall in the previous two years, has upset bankers. Their argument is that the small savings schemes that provide interest rate of 7.5%?post office time deposits, post office recurring deposits?and 8%?monthly income scheme, national saving certificate issue, Kisan Vikas Patra and the public provident fund?set a floor to bank deposit rates.
This thesis gains more credence because small savings schemes like public provident fund and national saving scheme have the added advantage of attracting tax deductions. Interest rates on bank deposit of one year maturity has now come down to the 6.5-8.25% range as compared to the 8-8.75% range a year back. So, banks cannot further lower their deposit rates as long as administered interest rates remain at 8% at the higher end?that?s the conventional wisdom.
But what bankers won?t tell you is this: small savings continue to flourish because of lacunae in the banking sector and they supplement banking functions rather than just compete for deposits. The best evidence of the supplementary role of the small savings scheme is the most recent trend in the post office savings bank deposits.
This accounted for more than a third of total deposits inflows into the small savings account in 2008-09. Of the Rs 20,016 crore of additional resources mobilised under small savings in the last year around half (Rs 9,348 crore) was accounted by the post office savings banks deposits. This pays an interest of just 3.5% to the depositors. The increase in inflows into other important small savings schemes like monthly income scheme, national savings certificate issues and Kisan Vikas Patra, which provide interest rate of 8% and above, were much smaller at Rs 6,464 crore, Rs 646 crore and Rs 446 crore respectively. So the question to bankers is, how could post office savings bank deposits grow by as much 21.7% when the scheme offered only 3.5%? What bankers are ignoring is that stake holders in the small saving segment have built an impressive infrastructure, especially in rural areas. And this trend would further pick up steam as growth in the rural sector gains further momentum. After all, weather-corrected growth in the agriculture sector has picked up from 1.5% in the nineties to 2.5% in the current decade.
A recent study by the World Savings Bank Institute shows that small savings products of the National Savings Institute (NSI), which is set up by the government of India to promote the national savings movement, reached 24% households and 7% of the poorest households. By 2007, NSI provided 55 million savings accounts: one account for every 16 adults in the country. The extensive reach of the NSI has been built mainly through an extensive network of 155,500 post offices.
Incidentally, post offices outnumber bank branches in rural areas by a factor of four. In 2008, the scheduled commercial bank network in the rural sector was 30,977 branches strong. The number of rural post offices stood at 130,847. Deposits in the post office savings bank deposits will now grow even faster as payments made under the NREGare routed through the post offices and rural banks to reduce leakages. The most important effect of small savings is not that they distort banks? deposit rates but that they provide financial inclusion.
p.raghavan@expressindia.co