Small savings flow from Post office to Banks

The recent cuts in small savings interest rates are signposts that signal the Centre’s intention to steer investors away from the hugely popular post office deposits and towards bank deposits. The underlying rationale is for the government to save on the interest outgo on post office small savings schemes, which has grown by double digits in the past two years –– a trend not seen in the past decade.

“Over the last two years, post office deposits have been attracting incremental inflows. By reducing the interest rate on these schemes, the Centre is in a way dissuading savers from parking money in post office deposits,” says Gopalakrishnan V, Principal Financial Planner, Founder & CEO, Money Avenues.

Savings on interest outgo

“This will help the Centre reduce its interest outgo on these schemes substantially,” he adds.

Indicatively, according to RBI data, five-year post office deposits grew 24 per cent annually between 2011-12 and 2014-15. Data until August 2015 also show that these deposits continue to grow at over 20 per cent year-on-year.

Bank deposits of similar maturity have grown at a lower 14 per cent during this period.

Interest rate differential

The hitherto-wide interest rate differential between post office deposits and bank deposits may have accounted for this investor preference.

Thanks to the RBI’s rate cuts in the past year, bank deposit rates have fallen sharply. For the most part, they offer about 7.75 per cent, although one or two banks offer a higher 8-8.2 per cent.

On a like-to-like comparison, it is the five-year post office deposit that competes with a bank fixed deposit. The five-year National Savings Certificates (NSC), on the other hand, are seen as more of a tax-saving instrument.

According to Gopalakrishnan, it is the post office term deposits that attract traditional savings, and the higher rates offered by these schemes in the last two years have led to a collection surge.

With the recent tweak in small savings interest rates, however, the Centre has brought rates on five-year post office deposits on a par with bank deposits.

Indicatively, come April 1, five-year post office deposits will earn 7.9 per cent, against the 8.5 per cent they earned in 2014-15 and 2015-16.

Explaining the variance

In fact, the government’s intention of steering investors away from post office deposits and towards bank deposits explains one another curious anomaly: the variance in the rates of five-year post office term deposits and the five-year NSC.

The small savings interest rate cuts were supposedly effected by assigning specific mark-ups for each instrument over G-Sec rates of similar maturity. Accordingly, five-year post office deposits and five-year NSCs enjoy a 25 basis point spread (or 0.25 percentage point spread) over G-Sec rates of five-year maturity.

However, while the five-year post office deposit will earn 7.9 per cent interest from April 1, the NSC will earn a higher rate of 8.1 per cent.

Effectively, by pegging down the interest offered on post office term deposits, the Centre has now brought them on a par with bank deposits. If the five-year post office deposit rates had been kept at 8.1 per cent (as with the NSC), bank deposits would have continued to lose their sheen even going forward.

The interest rates on one- and two-year post office term deposits have, in fact, seen sharper reductions. In other words, the signposts are pointing the way ahead for investors: they can no longer count on post office deposits to offer disproportionately high returns vis-à-vis bank deposits.

Credits The Hindu Business Line

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