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Bank deposits outpace post office schemes

Rising interest rates on bank deposits over the last two years have made them more attractive when compared to Post Office Small Savings schemes, reports Srinivasalu Reddy.

india Updated: Sep 02, 2008 21:19 IST
HT Correspondent

Rising interest rates on bank deposits over the last two years have made them more attractive when compared to Post Office Small Savings (POSS) schemes, pushing them to suffer negative net growth since December 2007.

By end-March 2008, POSS schemes suffered a deceleration in corpus by Rs 11,212 crore to Rs 126,742 crore, according to the figures available with the National Savings Institute, which is entrusted with the task of mobilization of small savings, through national level publicity. The previous year POSS schemes added a net of 36,761 crore to its corpus.

“In order to revive interest in postal deposits, the government announced in December 2007 some incentives, including tax benefits for certain postal deposits. However, the data suggests that net outflows continued up to June 2008,” RBI said in its Annual Report for 2007-08.

On the other hand, both demand (savings bank and current account) and time deposits of banks rose by 20.8 per cent and 21.5 per cent respectively during 2007-08, compared to 17.1 per cent and 23.5 per cent respectively during the previous year. Time deposits are deposits with a specific maturity periods and spanning from a minimum of 15 days to 10 years timeframe.

Particularly referring to the banks’ ability to sustain high growth pace in expanding their time deposit portfolio for one more year, RBI said, “The Strong growth in time deposits could be attributed, inter alia, to robust economic activity, higher interest rates on bank deposits and extension of tax benefits under Section 80 C (of Income-Tax Act) for bank deposits.”

While Small Savings schemes continue to offer interest at the rate of around 8 per cent, bank deposit rates soared to 9.5-10 per cent by now. Banks also offer 50 basis points (100 basis points is equal to one per cent) for senior citizens, besides offering tax benefits for deposits of above five years.

This prospect led to small savings schemes seeing a net outflow for the month of December 2007 for the first time in several years. By March 2008, the net outflow from these schemes bloated to Rs 11,212 crore, according to the figures available with the National Savings Institute, which is entrusted with the task of mobilisation of small savings, through national level publicity.

In December 2007, the Centre extended the tax benefits applicable to bank deposits to Post Office Time Deposit Account (POMIA) and Senior Citizens Savings Scheme and made the new norms applicable with retrospective effect from April 1, 2007. Besides, a bonus at the rate of 5 per cent will be payable on the deposits made under POMIA scheme upon maturity boosting the effective yield on POMIA to 8.9 per cent against 8.3 per cent earlier. Interest rates on POMIA scheme were gradually brought down from 9.5 per cent to 9 per cent since March 1, 2003, and further to 8 per cent a year later.