They have an invaluable role as a provider of social security net, which ought not to be downplayed
Small savings schemes — post office savings bank account, senior citizens' savings scheme, National Savings Certificate, public provident fund (PPF) and others — are sought to be made more popular.
In accepting most of the recommendations of an expert group, headed by RBI Deputy Governor Shyamala Gopinath, the government proposes to give a market orientation to these schemes. Basically that involves linking interest rate on these schemes to some well-known benchmarks such as yield from government securities of comparable maturities.
The change has become necessary because the administered interest rates applicable to these schemes have lagged behind the deposit interest rates offered by the banking system. Though similar to bank deposits in their structure, their interest rates are not set on commercial considerations. Small savings collections have been declining recently.
The difference has become particularly pronounced after banks were given the freedom to fix their own rates on all their deposit schemes. The last bastion of administered interest rates in banks fell recently with the RBI freeing the savings bank deposit rates. In contrast, the interest rate on post office savings bank will continue to be administered. They will, however, pay 4 per cent as against 3.5 per cent earlier. (This move has its basis in the committee's recommendations that wanted the post office savings bank to match commercial banks. The committee was constituted more than a year ago. Since then, banks have been allowed to fix their own rates, including on savings bank).
Panel's approach
The committee's approach to small savings has, however, emanated from the angle of public finance, not just the private finance problems of savers.
Not surprising because it was set up at the instance of the 13th Finance Commission.
Apart from being asked to comprehensively review the various small savings schemes in operation with a view to making them more flexible and market-oriented, the committee was asked to look at the entire mechanism of the National Small Savings Fund (NSSF), especially its role in financing the Centre and the States.
While discussing the relative popularity of the small savings schemes and bank deposits, one is apt to forget that small savings schemes have a crucial role in public finance. Forming a significant part of the internal liabilities of the Central government, small savings are contractual savings of the public, which are not part of the Consolidated Fund of India.
Net accretions through small savings finance a part of the fiscal deficit. This has been coming down. The government recently announced an extra borrowing of Rs.53,000 crore from the market to make up for the shortfall in small savings.
With the implementation of the key recommendations of the committee, the process of fixing interest rates on small savings schemes will become transparent. That should help in a more cost-effective management of public finances at the Centre and the States. But will the move revive popular interest in these schemes?
It would be naïve to assume that a mere tinkering with the interest rates is enough to check the falling collections under small savings. Even more basically, small savings schemes, now being referred to cover a gamut of schemes ranging from the highly liquid post office SB deposits to the long dated Public Provident Fund (PPF), which is essentially a retirement option, confer outstanding tax advantages. Obviously, there cannot be a single point solution by way of higher interest rates to entice savers under all categories.
That is why the recent changes in the public provident fund (PPF) make it particularly attractive. A tax payer can invest up to Rs.1 lakh (Rs.70,000 now) and claim tax benefits under Sec. 80 C of the Income-tax Act. Besides, because of the linkage to market rates, the PPF will now pay 8.6 per cent, up from 8 per cent. In all these calculations, however, it is assumed that the interest rates will hold steady, at least for a reasonable period.
One important move here is to reset the interest rate on the small savings schemes on an annual basis. Too frequent changes will unsettle savers. At the same time, interest rates will have to reflect markets rates.
The postal time deposits and the Monthly Income Scheme (MIS) have many features of bank fixed deposits. However, the bonus (of 5 per cent) the MIS offered on maturity is being abolished and the interest rates on time deposits and the MIS are being realigned with market interest rates. There are a large number of schemes that come under the category of small savings. These serve the thrift needs of various sections of the population. Realising this, the committee has recommended just one scheme — the Kisan Vikas Patra — for closure. This scheme, however, accounts for a large share (more than 25 per cent) of small savings.
The only reason for its closure is that it is in the nature of a bearer bond and hence prone to be used for tax evasion. Small savings should complement bank deposit schemes. They also have an invaluable role as a provider of social security net, which ought not to be downplayed.
Keywords: small savings schemes, social security, PPF, interest rates
I heartily thank all the people commented above and appreciate Mr. C.R.L. Narasimhan for putting up the issue clearly to the public.
I wonder why the civil service officials (I.A.S, I.P.S & I.R.S)under the ministry do not understand and give acceptance for this sought of policies.
Now-a-days many overseas banks are coming into operations and slowly attracting young generations by providing easy financial services.
So directly or indirectly our government is losing the young generation.
Information Technology industry are pumping crores & crores of money but private sector banks & companies are benefited through attracting them by shares and stocks.
Central & State Governments can utilize by proper advertisements and educate them about government financial products.
How many people know about State Governments transport, finance or other sector deposits?
Now Post Office and other state & central government agents are being targeted. I do not know where this going to end.
I agree with suggestion of Mr. R. Venkataraman. But what about the livelihood of lakhs of Agents family in the country? The Govt. should not think it as Profit & Loss A/c. They have to be accommodated suitably and their services may be utilised effedtively at cheaper cost as a Social Security Obligation of Govt.
The postal savings deposits were given to state govts. as long term loans in the past and state govts. appointed agents to mobilise the savings. Now that due to increased cost on loans from central govt based on the net collections through postal savings schemes and due to availability of cheaper loans from other sources, state govts. no longer avail loans from govt. of India. It is high time the agents are abolished and the cost of agency is passed on to the depositors who invest inpostal savings schemes .Public are no longer to be motivated for savings , since even illiterate people attend nationalised banks for their deposits .Once this is done and interest rates are revised on par with nationalised banks,there will be tremendous increase in postal savings scehemes, since the counter services in postoffices have recently been made improved and they offer quick service at counters compared to any other banks.In fact most of the senior citizens prefer their deposits in post office.
I endorse your views of Mr. C.R.L. Narasimhan. It is for the Union Cabinet to take appropriate steps to save several lakhs of families doing Agency Work all over the country. It is therefore suggested that the Govt. of India must reconsider its decision and allow the Small Savings Agents to receive atleast the existing commission for the services rendered as Social Security Obligation and their services may be better utilised for various developmental Programmes of Govt. to reach the masses at gross route level.
The deposit rates of Post Offices are not at all attractive due to non revision of the rates for years together. Whereas, Banks have been increasing deposit rates constantly due to rise in inflation. The existing depositors have to continue till maturity. Once the matutiry period is over they will switch on to Banks since they provide much higher rates compared to post office rates. The MIS and Sr.Citizen Scheme have become lesser attractive compared to Banks FD.
The Post Office Savings Scheme are not at all attractive now a days compared to the schemes of Public Sector Banks. The Monthly Income Scheme once a very popular has lost its shine since the interest rate has been stagnant for years when interest rate of Banks have increased many field. Furthermore, the recent announcement of doing away with the maturity bonus which was reduced to 5% from the earlier 10% will further bring in disillusionment due to loss of income compared to the interest rate of banks on fixed deposits. Similarly the Sr.Citizen Savings Scheme is also far less attractive due to offer of higher rates to Senior Citizens in Banks' fixed deposit scheme. Existing depositors have little choice but to continue with the schemes but there will be very few new depositors. If the Post Office Schemes are to compete with Banks, then they have to offer similar, if not better rates to the depositors. Many Banks offer 10.5% interest to sr citizens on deposit schemes, same steps needed
PPF and other small saving schemes need to be introduced to younger generations. As a responsiblity, the RBI and government needs to quicken their pace to attract young people to save for their future which is lacking at the current age. Make social security very attractive by introducing online deposite scheme etc. The government and government orgainsations need to 'think ahead' but also not let down older generation. After 20-25 year most of the Indian Population will be techy and if we lose this chance then we will be 50 years behind by 2050.
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