Centre's move to slash savings schemes interest rates by 0.2 percentage points is solely aimed at facilitating banks to lower deposit rates. National Savings Certificate (NSC), Sukanya Samriddhi Account, Kisan Vikas Patra (KVP) and Public Provident Fund (PPF) bear the impact. Savings deposit rates have, however, been retained at 4 per cent. The Modi government has since April last year started deciding on interest rates on all small savings schemes on a quarterly basis.
The latest decision addresses the concern of banks that they cannot bring down their cost of funds and lower lending rates, if small savings rates are higher than their deposit rates. But there appears another motive to government action.
A nearly three-fold rise in national small savings fund (NSSF) and contributions to PPF through banks places enormous burden on it which pays interest at 8.4 per cent as compared to a maximum of 7 per cent in the open market. Add to it is the growing public preference for small savings. NSSF borrowings form a part of outstanding liabilities of the government. Hence, any rise in them affects its cash position.
Small saving schemes are a very crucial part of household savings in the country. Cut in their rates is sure to rankle households, particularly those of senior citizens. But, the government defends such a move, citing the scenario of high interest rates in India. Thereby, it seems to have put the interests of banks above those of small depositors. Conversely, banks should have been pressured to clean up balance sheets, by going after wilful defaulters.
In a way, government is choosing an easy way, even as it pains small men out there. The very purpose of governments taking upon themselves the burden of paying interest rates and retaining the power to adjust small savings rates – which is actually the preserve of central banks – is ordained by the welfare state concept. It is acknowledged that small savings come to aid of governments in times of financial crises. Making them less attractive than bank deposits may prompt small savers, especially in rural areas without a wide banking presence, to go to private money lenders, ponzi schemes and fly-by-night operators. Entire life savings could be lost in any event of fraud.
Against the background of less appealing real estate, small savings could be made more attractive to gold buyers, to channel a part of such unproductive investments into small savings, for funding welfare programmes. This eases up current account deficit, which offsets any burden of higher rates on small savings deposits. Governments need to foster and sustain savings habits among citizens, more so for those at the lower rung, to help them cope with needs at a later stage.
The Modi government now runs the risk of appearing apathetic to the concerns and interests of small depositors and retirees, who prefer ‘low risk, low return’ schemes to speculative ones. Those choosing bank FDs are also in for a shock as banks would be pruning rates. The government should at least henceforth abstain from fiddling with small savings rates any further.