Small Savings Schemes Loosing out to Bank Deposits as Interest Rates Shoot Up: ASSOCHAM

Small Savings have experienced a whopping decline of 21 per cent during the financial year 2006-07 as commercial banks offer higher interest rates on the deposits to lure investors, according to the ASSOCHAM Eco Pulse Study (AEP).

An ASSOCHAM Study on “Growth Trend of Small Savings Schemes” has revealed that the collection under the small saving schemes run by the State and the Central Government registered a steep decline of 21 per cent in the financial year 2006-07 as compared to the compound annual growth rate of 13 per cent during six years period from 2000-01 to 2005-06. At the same time, the saving deposits with banks increased by 14 per cent maintaining the CAGR of 19 per cent.

In addition, it was observed that the Government has also lost interest from these small saving schemes due to the high interest cost associated with them, while they can obtain debt from market at lower rates. “High interest regime has introduced the small saving schemes to the direct competition from the commercial banks. With the advent of private fund managers gaining strength in financial market, the small savings could face some more loss in its deposits”, said Mr. Venugopal Dhoot, President, ASSOCHAM.

Total receipts under the small savings schemes during the financial year 2006-07 were worth Rs. 1,37,560 crore as compared to Rs. 1,73,283 crore in the previous year. The amount outstanding in these schemes was Rs. 5,59,932 crore. Total saving bank deposits with the commercial banks was Rs. 6,55,274 crore at the end of FY07.

Small savings schemes including post office saving bank deposits, national saving schemes, monthly income schemes, national saving certificates, Indira Vikas Patra etc, are meant for to mobilize the savings from the small investors as they carry attractive interest rates, sovereign guarantee, tax benefits, said Mr. Dhoot.

Commercial banks raised the deposit rates by 200 basis points during the financial year 2006-07, as the Reserve bank tightened the money flow in the market. The rate of return on the deposits of 1 month to a year was 7 per cent as compared to 5 per cent in 2005-06, and the rate on deposits of more than 1 year was 9 per cent. Consequently, the flow of the savings changed their course from, Small Saving Schemes in which rate of return is Government administered, to saving deposits with the banks. The interest rates offered by the small saving schemes range between 3.5 per cent on saving deposit account, 7.5 per cent on 1 year time deposits and 8 per cent on 2 year deposits.

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