Small savings’ populism PDF Print E-mail
Saturday, 07 January 2017 00:00
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Saikat's edit

Govt backtracking on reform is a serious problem


Though the surge of liquidity has allowed banks to sharply cut rates for new borrowers – no bank has cut base rates – a longer-run solution is not possible unless the government stops pampering small savers. As long as interest rates on small savings like NSC and PPF remain high, this acts as a floor to bank interest rates – else, depositors will abandon them for post office accounts – and, in turn, on lending rates. It is for this reason that, last February, the government decided to recalibrate small savings’ rates regularly, in keeping with the regular fall in rates on government securities (G-Secs) which are the benchmark for all interest rates in the economy. As the release said, ‘small savings interest rates are perceived to limit the banking sector’s ability to lower deposit rates’;so, ‘in the context of easing the transmission of the lower interest rates”, the government announced it would recalibrate interest rates on small savings on a quarterly basis to ‘align the small saving interest rates with the market rates of the relevant Government securities’. For certain schemes like Sukanya Samriddhi Yojana and the Senior Citizen Savings Scheme, the spreads were kept at very high levels – 75bps and 100bps respectively – while for others like Kisan Vikas Patras and 1/2/3-year deposits, the 25bps spread was removed. Certain dates were fixed for the rates to be notified on the basis of the previous quarter’s average GSec rates.


The first rate cuts were made for April, though the cut which was to be announced in June – for the July to September period – was not made and a very minor reset was done for the October to December period. No reset was announced – it was to be done on December 15 – for the January to March period. As a result, interest rates on small savings continue to remain very high. While the yield on a 5-year G-Sec has fallen from 7.378% in April to 6.179% today, interest rates on 5-year NSCs are at 8%, down from 8.5% in FY16 – since such savings were to have a 25bps spread, the rates should have been around 6.7-6.8%; bank deposits of a similar tenure have seen rates fall from 7.5% in early April to 6.5% today. The PPF rate, based on the 25bps spread it was to have over 10-year GSecs, should have been under 7% since the 3-month average bond yield was 6.57% – the actual rate is much higher at 8%. Once you factor in the tax benefits on small savings – interest earnings on PPF are tax-free – and keep in mind bank interest rates are taxable, the difference becomes even worse. Given the government had announced this reform almost a year ago, why it is not being implemented is odd – this makes it clear that a high degree of ad hocism still remains when it comes to even notified reforms.



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