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Small savings rates to be market-linked

india Updated: Nov 14, 2011 21:25 IST
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Last week, the government hiked up the interest rate it pays on the small savings schemes such as PPF, post office savings deposits, monthly income schemes and NSC. Obviously, this will be welcomed by those who use these instruments for their savings. However, the current set of changes in these interest rates is far more significant than those in the past. I would say that the changes signify that the government has realised that it can no longer take the 'small saver' for granted.

The more important announcement is that these rates will now be market-linked. The rate paid on each instrument will be linked to government securities of a similar maturity, with a spread of 0.25%. Fresh interest rates will be announced every year on April 1st.

The impetus for this comes from the massive decline in the inflows to these schemes during the last five years. Earlier, the growth in these deposits more or less kept pace with the growth in bank deposits. According to the data published in the report of the Gopinath Committee on small savings, the annual growth rates of both bank deposits and small savings varied in the 13-22% between 1999 and 2005. But since then, small savings have languished far behind, even declining in 2007-08 and 2008-09. In sharp contrast, these were years of robust, 20+% growth for banks.

The asset base of small savings is now just short of Rs 8 lakh crore. Had it kept pace with banks for the last five years, this would have been about Rs 13 lakh crore. Clearly, the finance ministry is missing that extra Rs 5 lakh crore, and is now willing to go the extra mile to compete with the banks for your savings.