Date:03/05/2007 URL: http://www.thehindubusinessline.com/2007/05/03/stories/2007050305000100.htm

Back Small savings go out of favour on low rates

K.R. Srivats

Bank deposits are the flavour of the season

Shifting counters
Small savings schemes in post offices and banks declined 12.56 per cent during April-February 2006-07
Net collections under small savings schemes have also declined 38.93 per cent

New Delhi May 2 With bank deposit rates on the rise, low and middle-income households appear to be shedding their conservative mindset by turning away from small savings to get better returns on their investments.

A large section of such income-groups, prompted by inflation concerns, has moved away from the ubiquitous post offices and the small savings schemes to not only bank deposits but also capital market-linked instruments such as ULIPs during fiscal 2006-07.

The favourable interest rate differential has spurred the shift from small savings to time deposits of banks, especially during the second half of fiscal 2006-07.

The latest data with the Finance Ministry shows that gross collections under the small savings schemes in post offices and banks declined 12.56 per cent during April-February 2006-07 to Rs 1,56,756 crore as against Rs 1,79,263 crore in the same period the previous fiscal.

Gross collections under small savings during 2004-05 and 2005-06 stood at Rs 1,77,730 crore and Rs 2,00,148 crore respectively.

Net collections under small savings schemes have also declined 38.93 per cent in April-February 2006-07 to Rs 45,191 crore as against Rs 74,002 crore collected in the same period the previous fiscal.

Declining trend

In fact, there has been a declining trend in small savings collections in recent years. In 2005-06, net small savings collections at post offices and banks stood at Rs 85,086 crore. This was lower than the net collection level of Rs 96,788 crore recorded in 2004-05. The biggest beneficiaries of the decline in small savings collections are the commercial banks, which are offering higher interest rates to mobilise new deposits for meeting the credit binge. Interest rates on deposits of over one year maturity of public sector banks moved up from 5.75-7.25 per cent in April 2006 to 7.25-9.50 per cent in March 2007.

Bankers point out that a good number of them had coped with the credit expansion by offloading their surplus investment in government securities. With this option now almost exhausted, they are looking for fresh deposit mobilisation as the main recourse for funding credit growth in the economy. "With banks offering interest rates of 9-10.5 per cent for time deposits, small savers are clearly moving away from post offices to banks. The assured return of 8.5 per cent on small savings is becoming less attractive despite the sovereign guarantee," a banker said.

Banking industry observers also point out that the sensitivity of small savings mobilisation to the interest rates offered on competing instruments like bank deposits was quite high.

Traditionally, four States - Maharashtra, Uttar Pradesh, West Bengal and Gujarat - have accounted for almost half of the amount mobilised under small savings schemes.

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