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Come Back Small Savers

With the decontrolling of savings bank interest & increased rates for saving instruments, it’s bonanza time for small investors…

It’s reigning bonanza for savers. First; the RBI increased the savings bank interest rate to 4 per cent earlier this year from the stagnant 3.5 per cent that remained for long. Second; the RBI has done away with controlling the savings bank interest rate completely. Third; interest rates on all small savings instruments such as the Public Provident Fund (PPF), National Savings Certificate (NSC) and post office deposits have been increased subject to notification.

In 2010-11, household financial savings had dipped alarmingly as a percentage of GDP and according to a Citi Investment Research and Analysis report, ‘The RBI has attributed this to lower growth in bank deposits and insurance and an absolute decline in investment in shares and debentures…’ Boosting growth in bank deposits was an urgent need felt by the central bank. Considering the consistent rise in lending rates over the past several quarters, the savings account rate was being left behind hurting the interests of several savers. But what drove the RBI to decontrol savings bank interest rates was the freedom that banks enjoyed in deciding what to charge their individual and corporate borrowers, as also what rate to offer fixed deposit holders. The logical progression was to extend the flexibility with interest rates on savings bank account.

Today, several banks, especially those with less share of CASA (Current Account and Saving Account) have reasons to lure investors to open accounts with them. For instance, both YES Bank and Kotak Mahindra Bank increased the interest on savings bank account to 5.5 per cent and for balance above Rs 1 lakh in savings bank account the interest offered was in excess of 6 per cent. While this may set in an interest rate war amongst banks; account holders have reasons to cheer from the development which allows them choice. However, not many account holders are expected to change their bank accounts purely on the basis of better interest rate offerings considering several on-going banking facilities they being used to with their existing banks.

Advantage Small Savings
Despite assorted tax incentives that they enjoy, the growth rate of small savings has been lagging due to unattractive interest rates offered compared to several bank deposit options. In an effort to bring back small savers to its fold, the RBI has increased the interest rates across financial products. Once the change is notified the postal savings account will fetch 4 per cent interest instead of the current 3.5 per cent, Monthly Income Scheme (MIS) and PPF will fetch attractive returns of 8.2 per cent and 8.6 per cent respectively, as compared to the existing rates of 8 per cent. The biggest gainer from the move is the one-year fixed deposit that now fetches 7.7 per cent compared to the current 6.25 per cent (See Changing Rates).

However, the Government has decided to discontinue the popular Kisan Vikas Patra (KVP) scheme and has introduced a new variant of the NSC with 10-year tenure. The maturity period for the MIS and NSC schemes has been reduced to five years from the existing six years. Likewise, the popularity of PPF has resulted in an increase in the investment limit from the existing Rs 70,000 to Rs 1 lakh. Where investors will lose out is on the 5 per cent maturity bonus offered on MIS and the same interest rate offered on the Senior Citizens Savings Scheme (SCSS). The commission earned by agents on PPF and SCSS is also abolished.

All these changes will come into effect from the date they are notified and will renew interest amongst investors in these schemes that has not grown between 2006-07 and 2009-10. The coming back of small savers will also help the Government, which was otherwise forced to borrow higher-than-budgeted amounts in the first five months of this fiscal year. Now, with an increase in the interest rates; the Government will be in a better position on its borrowings and for the small investor there is every reason to laugh all the way to the bank and the post office.