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Govt May Harm Small Savers

Banks have been pressurizing the government to cut the interest rates being offered to investors

To make sure there is a deep cut effected in lending rates by banks, the government may slash interest rates on small savings schemes because they have been blamed for keeping the average cost of deposits higher. Banks fear that they will lose depositors if the government-run schemes offer more money to investors than what is paid by banks to their depositors in fixed deposits or term plans.

While the step may not go down very well with the people who invest in these schemes, but for others, who are looking to take loans at a cheaper rate this step may well prove profitable. The reason behind it being the banks’ reluctance to cut interest rates on loans till the government does not cut the interest rates on small savings schemes.
The trend of cutting the interest rate paid on small savings started quite some time ago. In 1999, the interest that people got on their money invested in small savings schemes was 12 per cent, since then it has been whittled down to 8 per cent and now the banks want it to be slashed further to at least 7 per cent, reports the Economic Times.

Small savings schemes are very popular with millions of people investing in them to ensure their money makes gains, and does so without any accompanying risk in addition to offering guaranteed returns as well as tax breaks. The amount invested in these schemes jumped from Rs 123,652 crore in 2007-08 to Rs 143,668 crore in 2008-09.

The banks have been asking for this step to be taken by the government for quite some time and most recently the message was impressed upon the new Finance Minister Pranab Mukherjee in the meetings he held with the banking sector officials.

The reason this demand by banks to cut small savings rates may actually be cleared by government lies in the economic slowdown that has been caused by the global financial crisis where money is not available on low rates to anyone and even then banks are not willing to trust people enough, thinking that in this economic scenario loans may not get repaid.

Banks also believe that if the government does not cut the rates of interest on these schemes, then people will have no reason to invest in banks’ own term deposits, and this will hit them very hard.

The minister has been insisting that banks must reduce their interest rates on loans to corporates and individuals to spur spending, on business expansion by the former and on consumption by the later, to spur the economy. But bankers have not been willing to do so. If the government reduces the administered interest rates on small savings schemes, then there is a likelihood the banks will reduce their interest rates on loans to spur the economy out of the slowdown.

There is a lot of liquidity in the system, especially after the Reserve Bank of India cut key rates and also because of the various stimulus and bailout plans by the government, yet that money is not being used as credit offtake is poor. The government wants to end that problem and get the wheels of the economy whirring again.

The first inkling of that happening may well be on the presentation of Budget 2009.