At­trac­tive­ness of small sav­ings schemes will mod­er­ate

Banking Frontiers - - Research Notes - SSS -

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.

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