Banking on small savings
Apropos of the report “Small savings to earn 20-50 bps less” (FE, January 14), the government’s latest move to “rationalise” interest rates on small savings schemes of under-five-year tenures, thus enabling banks to transmit the policy rate reduction by Reserve Bank of India to borrowers must have raised some eye brows for the simple reason that it would only serve as a mid-term financial shock to the millions of investors in various government-run small saving schemes.
Mind you, these investments were made by them for the full tenure of 1-5 years and not for any part thereof, as they were assured of the yearly interest earnings ranging from 8.4% to 9.3%. One really wonders as to why the government seems so keen to rob Peter to pay Paul? Where is the guarantee that all these banks, which are more interested in shoring up their balance-sheets and have quite intentionally transmitted only 60 basis points cuts in their lending rates despite the 125 basis point repo rate cuts announced by RBI in 2015, will now fall in line? Further, once these rates are announced, bank’s deposit rates may fall further. Ironically, these banks have already implemented a substantial reduction in their term deposits rates after the announcement of repo-rate cuts on five occasions by RBI.
How they would, in such a situation, fulfil their wish to keep their deposit rates attractive to match those in small savings schemes that are popular among masses?
Are they expecting the small savings rate of interests to be brought down to the level of their fixed deposit rates? It is a different matter that the government may consider fixing the small savings rate on a par with the five-year government security yields. Let us wait and watch. In any case, the finance ministry’s new formulation to reset rates on a quarterly basis would naturally go against the very grain of these original schemes.
Thus, in all fairness, the proposed alignment to be done on a quarterly basis to ensure that small savings rate does not become an impediment in the monetary policy’s transmission process must be implemented from the next financial year only, i.e., from April 1, 2016. This would obviously enable all existing investors to take a conscious decision, keeping in view their respective tax liabilities and/or their own social security requirements in the wake of newly emerging interest rates scenario.
Kumar Gupt, Panchkula