Small saving schemes in India

Reading time: 8-10 minutes.

The outbreak of COVID-19 has left the economy struggling. The Union government and the Reserve Bank of India (RBI) are trying to deal with the situation. The government recently announced a cut in the interest rates of small saving schemes. This came a few days after the RBI lowered the Repo Rate (Rate at which the RBI lends money to the banks). These measures are an attempt to withstand the hit on the economy brought about by the pandemic. The aim has been to increase the flow of money in the economy.

With the lowering of repo rate and reverse repo rate, the interest rates for small savings schemes were also cut. These rates are generally calculated and changed quarterly using basis points. The interest rates for various small savings schemes saw a cut between 70 bps and 140 bps. These will remain in force for the quarter of April to June 2020.

The following changes have been brought in:

Name of the InstrumentOld RateNew Rate
1,2- & 3-years’ time deposit6.95.5
5 years’ time deposit7.76.7
5 years’ recurring deposit7.25.8
Senior Citizens Savings Scheme8.67.4
Monthly Income Account7.66.6
National Savings Scheme7.96.8
Public Provident Fund7.97.1
Kisan Vikas Patra7.66.9
Sukanya Samriddhi Yojana8.47.6

This was the first time that interest rates were lowered since the quarter of July 2019. These recent cuts are at a record low. For instance, the interest rate of 7.1% on Public Provident Funds (PPF) is the lowest offered in the last 43 years.

Significance of this development

The outbreak of COVID-19 has forced the nations across the globe to go under a complete lockdown. This has affected the world economy and there is a prediction of a global recession. The world will be facing a severe cash crunch.

India has been under a complete lockdown for the past three weeks which has now been extended till 3rd May 2020. About 80% of the industries are facing a money crunch. The demand for goods other than fast-moving consumer goods (FMCG’s) and pharma have taken a hit. The Central government along with RBI has introduced various measures such as extending dates for payment of interest on loans, payment of Income Tax and providing monetary benefits to the poor among others. In such trying times, it is important to maintain a cash flow in the economy. A decrease in the repo rate encourages banks to lend more money to consumers. As a consequence, cash flow increases gradually.

Further, a cut in the interest rates of the small savings scheme will discourage people from saving. This can lead to more spending thereby increasing the cash flow. It will also close the gap between bank rates and small savings rates.

The consumption cycle of the country has been dwindling for quite some time. Coupled with the present situation, it becomes essential to sustain the economy. According to the latest data, household savings in India accounts only for 30.1% of the GDP at present. In the current situation of lowered interest rates and a fall in savings, India’s macro-economic position has weakened. It is a slippery slope and thus, the government must tread with care.

What are small savings schemes?

‘Post office savings bank’ is an entry in the Union List under the Seventh Schedule. The savings movement existed in India even before Independence. After Independence, the government took the initiative to promote the concept further. The savings movement was first recognized in 1948. It was then that the government established the National Savings Organisation. The concept of “small savings” was introduced through various legislations such as the Public Provident Fund Act 1968, Savings Certificate Act, 1959, etc.

 The National Small Savings Fund was created in 1999 to manage the deposits of the small savings schemes. It created a fund independent of the Consolidated Fund. It is a Public Account of the budget and thus does not have a direct impact on India’s fiscal deficit.

Small Savings schemes are instruments with government backing. They are well managed through post offices, public sector banks as well as private sector banks. These are instruments introduced to develop a healthy habit of savings amongst the large population of India on a long-term basis. The rates on these instruments are revised quarterly.

These schemes were introduced despite existing Recurring Deposits and Financial Deposits facility in banks. The motive behind such a step was to include a major chunk of the population in the savings movement especially those with small earnings. The sheer variety of schemes is enough to encourage more and more people to invest. An amount of as low as that of Rs. 500 can be invested. Apart from this, the comparatively higher and fixed deposit rates make these schemes more favorable to the masses.

Small savings schemes available in India

The small savings schemes in India can be broadly divided into three categories:

A. Post Office Saving Schemes

Post offices have played a major role in providing various small investment options. Following are the major saving schemes provided by the post offices:

  • Post office savings account

The post office savings account is similar to the savings account facility provided by banks. This account can be opened with a minimum amount of Rs. 500. The interest earned through this account is tax-free to a limit of Rs. 10,000. Facilities such as cheque, ATM, nomination, transfer of account, etc. are also available.

  • National savings recurring deposit account

This account is opened with a minimum amount of Rs. 100 and requires a deposit of as low as Rs. 10 per month for its maintenance. This is encouraging for a huge chunk of the population to save and invest. This scheme matures after 5 years and can be extended further. This is a long term investment.

  • National savings time deposit account

The duration of time deposit accounts can vary from a year to five years. The minimum amount necessary for opening this account is Rs. 1000. Multiples of Rs. 100 can be deposited. There is no maximum retaining limit. The five-year term deposit under this scheme falls under the benefits as provided under section 80C of the Income Tax Act, 1961.

  • National savings monthly income scheme

This monthly scheme is unique and is offered only by the post office. It provides for fixed monthly investment. The maturity period for this scheme is five years. The interest is earned every month by the account holder. In case it is not claimed, the unclaimed interest will not earn additional interest.

B. Savings Certificates

The certificate schemes have been successful in encouraging people to invest and save small funds for the long term.

  • Kisan Vikas Patra (KVP)

The Kisan Vikas Patra was introduced in the year 1988. Its target population was based in rural and semi-urban areas. It was discontinued in 2011 after allegations of money laundering. but it was relaunched in 2014 with certain changes. one such change was the maturity period that was now 118 months (9 years and 10 months). KVP can be bought at any post office and can also be transferred from one post office to another.

  • National Savings Certificate

An investment in this scheme counts as a benefit under section 80C of the Income Tax Act, 1961. Backed by the government, this scheme comes with a promise of fixed returns.  The National Savings Certificate can also be transferred from one person to another bu only once.

C. Social Security Schemes

Social Security Schemes have always formed an important part of the economic measures by the government. Various social security schemes have been introduced that have met the needs of the target population.

  • Public Provident Fund (PPF)

PPF was first introduced in the year 1968. An account can be opened either in a post office or an authorized bank. The fund matures in 15 years. From then on, it becomes eligible for an extension of five years within a year of maturity. The deposits made into the account is eligible for tax concession under section 80C of the Income Tax Act. It is an optional scheme which is also one of the most popular.

  • Sukanya Samridhi Yojana

Various schemes were introduced by the Government under the umbrella of the Beti Bachao Beti Padhao campaign. Sukanya Samriddhi Yojana was one such scheme introduced in the year 2015. The target population for this scheme was girl children below 10 years of age. The scheme matures after 21 years of opening the account and can be closed. It can also be closed before the 21 year maturity period if the girl child gets married.

  • Senior Citizens Savings Scheme

Senior Citizens Savings Scheme is open to the population aged 60 years and above. This account can also be opened by those who are of 55 years but less than 60 years and have taken voluntary retirement. It matures in 5 years and can be opened in post offices and authorized banks.

Critical analysis

The main agenda behind introducing small savings schemes was to encourage the masses to be a part of the savings movement. Even if the contributions were small, these schemes presented a viable long term investment option. The small savings schemes have always operated mainly through post offices, followed by public sector banks. The government chose to implement these schemes through post offices. This was because post offices have a wider reach and they can are found even in the smallest of villages or tehsils.  These schemes promoted “geographical penetration” i.e. the savings fund comprised of investments made by people across the country.

There are a variety of schemes available in the market today. Each scheme has its benefits. These schemes provide a fixed and assured return. There are fewer formalities and no hassle. Minimum balance requirements are also easy to maintain. The interest rates are also higher than those provided through a traditional savings bank account. This keeps the small savings schemes at loggerheads with banks. There is a huge gap between their respective rates. It can mean a struggle on the banks’ part.

The small savings schemes have been constantly reviewed. A few of the recommendations arising out of the various reports have been implemented as well. For instance, the establishment of the National Savings Fund was one such recommendation. Though small savings schemes are important, they need some serious changes.

The Financial Sector Legislative Reforms Commission was set up to review the country’s existing financial system. it submitted its report in March 2013. This Commission made the following recommendations about small savings schemes:

  • Need for a consolidated law

The Commission considered numerous laws that were in place for managing the small savings scheme. It recommended that a consolidated law was a need of the hour. The government proposed such consolidation in 2018. But no such law has been introduced yet.

  • Independent entity

The Commission recommended that all the functions associated with the management and regulation of the small savings schemes must come under an independent entity. This independent entity would be under the purview of the financial regulator.

  • Government-backed even after the transfer

These small savings schemes need modernization. even when they are transferred to an independent entity, it must be specified that these schemes come with a government guarantee.

  • Protecting the consumer

The target customers of the small savings schemes are small savers. the Commission recommended that measures must be put in place to protect them. The new law must contain provisions offering investor protection, compensation mechanisms, and a better grievance redressal mechanism.

A cut in the interest rates of the small savings scheme is not new. A cut is usually made to balance the general interest rates prevailing in the economy.  This is to ensure that the small savings schemes do not pose a competition to facilities and services provided by banks. The interest rates are also calculated based on government securities and their yield. Though there are various benefits attached to the schemes, it has to be constantly restructured by creating a framework.

The latest cuts in interest rates are however a new experience. The rates are at a historic low. These are the times of a pandemic outbreak and the measures to stop its spread have brought the economy to a standstill. Our economy is dwindling. Recession is almost certain. It was in this backdrop that the government announced a cut in the repo rate followed by a cut in interest rates of small savings schemes.

This measure might seem effective but it does not promise long term relief. It will discourage people from saving and might encourage spending but the possibility is not so high. The people feel the uncertainty of these trying times and instead of spending, they would hold onto their savings for rainy days.

On the other hand, there would be fewer funds available for investment. It might increase the cash flow now but it would negatively impact the economy in the long term.

Conclusion

Ever since independence, the Indian government has been a proponent of savings. It has constantly promoted this concept through various schemes and measures. The introduction to such schemes was to encourage everyone to invest. The small savings schemes mobilized funds across the country. Banking through Post Office played a significant role in India’s savings movements to date. This way savings reached the whole nation through Post Offices with minimal formalities.

Many committees have given recommendations in the past for improving the system to make it smooth and efficient. If these recommendations are implemented, it would generate a change in the volume of funds. The recent cut in the interest rates is due to the stagnant state of the economy. There was a need to increase the flow of money. When the economy shows a slow and gradual return to normalcy, measures should be introduced to revise the interest rates upwards to encourage people to invest in the schemes.

Author: Harinie.S  from Symbiosis Law School Hyderabad.

Editor: Shalu Bhati  from Campus Law Centre, Faculty of Law, University of Delhi.

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