Small Saving Schemes
Balancing act on small savings schemes
India’s Savings Landscape: Balancing Bank Deposit Rate Cuts, Stable EPF & Small Savings Amid Fiscal Imperatives. (Image Source: Freepik)
By Siddhartha Sanyal, Chief economist and head of research, Bandhan Bank
Savings are crucial for growth and investment as they help mobilise capital into productive sectors of the economy. In India, household savings play a key role in overall savings as the former accounts for about 18% of GDP and about 60% of gross savings. Bank deposits, with a share of over 40%, are by far the largest constituent of household financial savings. The other modes of household financial savings typically encompass currency, shares and debentures, small savings, life insurance, and provident and pension funds.
Trends in interest rates on these alternative savings instruments present a mixed bag. Bank deposit rates have softened in recent months, partly reflecting the reduction in the Reserve Bank of India’s (RBI) policy repo rate by 100 basis points (bps) between February and June. The central bank also announced a slew of measures to provide ample liquidity in the banking system, ensuring better transmission. The weighted average term deposit rate on fresh deposits declined by about 27 bps between January and April. Going ahead, transmission to deposit rates is likely to continue with surplus liquidity.
On the other hand, for the employees’ provident fund (EPF), the government retained the same interest rate of 8.25% for 2024-25 from the previous year. In 2022-23, the Employees’ Provident Fund Organisation kept interest rate at 8.15%. Provident and pension funds have about 20% share in household financial savings as the government nudges towards formalisation of the economy.
For small savings (commonly referred to as postal deposits) — which now enjoy about 9% share in household financial savings against just 0.7% in 2013-14 — interest rates remained unchanged for a while. The total outstanding balance of small savings was about `18.7 lakh crore in March 2024, which has risen at an impressive compound annual growth rate of about 16% since March 2019.
The reach of small savings is widespread with about 1.65 lakh post offices offering such products (along with public sector banks and select private banks acting as the government’s agent for them). Despite the rise in the attractiveness of new-age high-yielding financial savings products in recent years, traditional avenues of household savings such as bank deposits and small savings continue to demonstrate strength and relevance. This reflects a wide reach and an easy-to-understand product offering, promoting a practice of healthy and sustained savings including for people at the bottom of the pyramid — especially during periods of high global uncertainty and volatile financial markets.
The government decides interest rates of different small savings schemes on a quarterly basis. Interest rates for different small savings schemes have been unchanged for the past six quarters. Rates on various small savings schemes are generally benchmarked against yields on government securities of similar tenors. Over the last year, yields on different tenors of government securities have come off significantly. With the beginning of the rate cut cycle by the RBI from February, yields on government papers have softened faster. This is more prominent in the shorter tenor of the yield curve due to higher liquidity in the banking system in recent months and may create some space for policymakers to review and reduce rates on some of the small savings products in the near future.
Proceeds from small savings also play an important role in financing the fiscal deficit of the government — net small savings today funds about 22% of fiscal deficit as against just about 13% in 2016-17. According to the FY26 Budget estimate, net small savings are expected to have a moderation of 20% to Rs oin3.4 lakh crore during the current year. A steep reduction in postal deposit rates may affect fund mobilisation in this account, which might, in turn, lead to higher market borrowings to an extent. Hence, it will be interesting to see how the government strikes a balance between adjusting small savings rates in line with moderation in yields on government securities in secondary markets and mobilising funds to finance the fiscal deficit without resorting to higher market borrowing.
Source : Financial Express
