Attractiveness of small savings schemes will moderate
The amount of total small savings that government has mobilized during the first six months of 2017-18 stood at `54,404 crore. The National Small Savings Fund (NSSF), an aggregate of savings through government plans such as post office, public provident fund (PPF) and kisan vikas patras, collected this amount as of 30 September, which is a edgrowth of 11% yoy.
All the saving schemes are categorized under three broad heads (i) postal deposits, comprising savings accounts, recurring deposits, time deposits of varying maturities and monthly income schemes (MIS); (ii) savings certificates, including National Small Savings Certificate (NSC) and Kisan Vikas Patra (KVP); and (iii) social security schemes such as public provident fund and Senior Citizens’ Savings Scheme (SCSS). These schemes provide an alternative avenue to saving in banks, often at interest rates that tend to be higher than bank deposits of a comparable maturity. Therefore, such schemes have at times been highlighted as a factor that hampers transmission of monetary easing to bank deposit and lending rates, particularly during periods of tight liquidity, according to ICRA report.
To reduce the hindrance posed by small savings schemes to the process of monetary transmission, interest rates on such schemes are being recalibrated on a quarterly basis and have been linked to average G-Sec yields of corresponding maturity in the trailing 3 months, since Q1FY2017. The central government has reduced interest rates on most small savings schemes by 20 bps for Q4 FY2018. The cut in interest rates on the other small savings schemes is in contrast to the trend displayed by G-Sec yields of various maturities, during the trailing 3-month period. The deviation from the announced linkage with G-sec rates, will add to uncertainty regarding the future trajectory of interest rates on small savings schemes. Over the course of 2017, the interest rates for most small savings schemes have been cut by 40 bps.
Despite the recent reduction in small savings rates, the ICRA report says banks are not expected to follow suit and reduce deposit rates, given the recent re-emergence of the liquidity deficit. Moreover, systemic liquidity is expected to remain relatively tight in Q4 FY2018, based on the anticipated pickup in credit offtake on an absolute basis.
Given that banks are unlikely to reduce deposit rates in the immediate term, the attractiveness of various small savings schemes would moderate, predicts ICRA.
In order to encourage savings, the government has recently allowed banks, including ICICI Bank, HDFC Bank and Axis Bank, to accept deposits under various small savings schemes.