The Hindu Business Line : Investors move away from small savings

Savings wane
Sources said that investors' preference for alternative investment avenues could have brought about the decline.
Another reason for the drop could be increasing inflation concerns among many households.

New Delhi , Dec. 5

For the first time in the last ten years, gross small savings collections in post offices and banks are showing a declining trend, going by the latest official data. During April-August this year, gross small savings collections have registered 11.29 per cent decline at Rs 73,456 crore as compared to Rs 82,800 crore collected during the same period last year.

Net collections during this period declined by 24.22 per cent to Rs 27,874 crore as compared to Rs 36,782 crore in April-August 2005, the latest data available with the Government showed.

Sources said that investors' preference for alternative investment avenues could have brought about the decline. It was also pointed out that the sensitivity of small savings mobilisation to the interest rate offered on competing instruments like bank deposits was quite high.

Banking industry sources highlighted that in the current fiscal the banks have come up with special 80C deduction (up to Rs 1 lakh) based deposit schemes to attract long-term deposits.

"The tax exemption under Section 80C coupled with increase in the interest rate of certain deposits have made an impact in terms of increased flow of deposits into banks this fiscal. There is a strong possibility of certain amount of small savings in post offices getting converted into fixed deposits in banks. Also, the lower interest differential between small savings and bank deposits could have led customers to the banking system, since the comfort of dealing with banks is better than with post offices," a public sector bank official said.

Rising inflation

Another reason for drop in small savings collections could be increasing inflation concerns among many households. Faced with sharp increase in primary products prices, many households are looking to high-risk instruments to better the returns on their investments.

The quintessential aam aadmi has traditionally been investing in small savings schemes as these are administered by the Central Government and considered to be safe investment options for individuals. An assured return with sovereign guarantee made these schemes attractive for small investors.

Traditionally, four States — Maharashtra, Uttar Pradesh, West Bengal and Gujarat — have accounted for almost half of the amount mobilised under small savings schemes.