With bank deposit rates touching the 10%-mark, investors are gradually losing appetite for small savings schemes, such as Public Provident Fund and Post Office National Savings Certificate. Despite tax incentives, the growth in small savings deposits has lagged due to their unattractive interest rates and the expansion of bank branches across the country.
During April to August 2011, small savings collections dipped and there was an outflow of around R400 crore. This has affected the government?s borrowing programme and the Centre now plans to bridge the gap by borrowing R53,000 crore.
In fact, following the recommendations of the Reddy Committee, there was a brief period? from FY 2001 to FY 2003? when small savings rates were aligned with market rates. However, since then, the rates have not seen any change.
An RBI expert committee under the chairmanship of Shyamala Gopinath, former deputy governor of the Central bank, has suggested that their rates be linked to the market rates.
In a recent report on household savings, Rohini Malkani, Citigroup?s chief economist for India, says that to shore up higher amounts under small savings, structural changes are required.
?To this end, implementing recommendations proposed by the Committee on National Small Savings Fund, such as rationalising the multiplicity of the schemes and benchmarking yields to the secondary market yields on Central government securities of comparable maturities, are the steps in the right direction,? she says.
Small savings schemes are operated through a network of around 1,50,000 post offices, 8,000 bank branches and 5,00,000 agents.
Among the various postal savings schemes, the monthly income scheme and Kisan Vikas Patra account for over 50% of the total outstanding savings.
Traditionally, after bank deposits, small savings are the second largest contributor to household financial savings. The outstanding collections under small savings have grown from R1.9 lakh crore in FY 2000 to R5.8 lakh crore in FY 2010.
The Citigroup?s analysts say while small savings play an important role in garnering resources, they play a relatively smaller role in financing the Centre?s deficit.
Experts, however, say to make small savings attractive to retail investors, the Centre must increase the interest rate now to make the returns inflation-adjusted.