With the government looking to spur demand and boost
growth, the finance ministry is planning a review of its small savings schemes
later this month, a finance ministry official told ET. Banks have long
complained to the government that interest rates on these schemes are too high
and need to be lowered to bring about a reduction in the cost of borrowing that
will in turn spark credit expansion.
Experts pointed out that the government will need to
proceed with caution as stakeholders are bound to protest forcefully at any such
move. The government is facing difficulty in taking its reform agenda forward
because of political opposition.
The finance ministry official said all options will be
considered at the review meeting.
Interest rates on small savings schemes are benchmarked
to the yield on government bonds and revised annually. The plans offer
depositors interest rates as high as 9.3% while banks give 7.5-8% on a
five-year fixed deposit of less than Rs 1 crore.
In their competition for funds, banks are unable to lower
rates significantly below those offered by small savings, and this prevents
them from pushing down lending costs.
The Indian Banks' Association (IBA) had raised the issue
with the finance ministry and specifically pointed out that high interest rates
offered under Sukanya Samriddhi Accounts and the Senior Citizens Savings Scheme
eat into their deposits.
"If the government can bring down the interest
rates, it will have a bigger impact than tweaking done by Reserve Bank in its
policy rates, as that affects only 2-3% of the banks' resources," said the
chairman of a state-run bank, adding that such a move can possibly bring down
the base rate by at least 50-100 basis points. A basis point is 0.01 percentage
point.
The base rate is the level below which a bank can't lend.
In the past six months, the Reserve Bank of India (RBI) has cut its policy rate
by a total of 0.75 percentage point at three times to 7.25% but banks have
passed on less than half that reduction. The RBI is scheduled to make its next
monetary policy announcement on August 4.
During the finance ministry's review of state-run banks
in July, bankers had raised the issue again. Finance minister Arun Jaitley said
the government had "heard them." Small savings schemes currently
include Savings Deposits of one, two, three and five-year terms; Recurring
Deposits; the Senior Citizens Savings Scheme; National Savings Certificates
(five and 10 years); Public Provident Fund (PPF); Kisan Vikas Patra and the
Sukanya Samriddhi Accounts.
The decision won't be easy as a reduction in rates will
make the plans less attractive, which will impact the government's financial
inclusion drive and could also increase the allure of gold.
Besides, the government has also budgeted Rs 22,408 crore
from small savings to meet its budget deficit. Economists are of the view that
interest rates on small savings schemes need to change to reflect the shifts in
the economy as inflation slows.
"If the government manages to keep inflation low,
investors will continue to get real returns on the money parked in these
schemes, even if rates are lowered a bit," said DK Joshi, director and
chief economist, Crisil.
Source:-The Economic Times
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