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Interest Rate on Small Savings to Fall Further


Dr Devendra Pant, Chief Economist, India Ratings believes the government’s move to reset interest on small savings schemes (SSS) quarterly based on the G-Sec yields of the previous three months with effect from FY17 is a move in the right direction.

Ind-Ra believes interest rates on SSS will fall further in FY17. Interest rate on SSS in 2QFY17 is likely to be 20bp-25bp lower than that in 1QFY17 due to i) the decline in benchmark government securities rate in response to monetary easing, ii) change in liquidity management regime by the Reserve Bank of India, and iii) the narrowing of the policy corridor to +/-50bp from +/-100bp.

The interest rates offered on SSS have been analysed by a number of committees in the past, and all of them have recommended a periodic resetting of interest rates to reflect the emerging macro context. Interest rates on SSS, however, were often found to be rigid downwards reflecting the predominance attached to the social security aspect of small savings rather than the viability of the scheme.

No doubt this will have implications for the large number of small investors who primarily live on the interest income generated by SSS, the viability of the scheme is equally important otherwise it will collapse under its own weight.

Ind-Ra believes this new move besides aligning the return on SSS to market rate, will reduce the income expense gap of National Small Savings Fund (NSSF) which has been rising over the years, the income expense gap of NSSF increased to INR130.1bn in FY16 (revised estimates) from INR16.81bn in FY00. The cumulative income expense gap stood at INR1037.16bn (0.76% of GDP) in FY16 (revised estimates).

Small savings collections are generally invested in special securities of the government of India and a small amount is invested as loans in India Infrastructure Finance Company Limited (‘IND AAA/Stable’) at an annual interest rate of 9%. The average interest earned on the funds collected under SSS and kept in NSSF has been less than 8.5 % since FY13.

However, the interest paid to depositors has remained in excess of 8.6%. Even in FY17, the average interest earning of NSSF is likely to be 8.3% and average interest pay out 8.5%. Small savings directly compete with the fixed deposit scheme offered by banks because of the high interest rates offered on the former.

A glance at the small savings data suggests that it indeed forms a significant part of the financial savings of Indian household and its share was 35.5% during FY00-FY14. Ind-Ra believes the reintroduction of Kisan Vikas Patra and introduction of Sukanya Samriddhi scheme are likely to have pushed it even higher in FY16. This does give some credence to banks’ view that the high interest rates offered on SSS instruments are a hindrance to faster monetary transmission.