JOIN USSmall may no longer remain beautiful. Come new year and the government may cut interest rates on small savings, a critical item for a middle-class household.
The government has been planning this measure since the last few months in order to enable banks to lower interest rates on lending, which will eventually reduce the cost of capital for the industry, perk up investments and generate employment.
Recently, banks have stepped up complaints that a high interest rate on small saving schemes are making it difficult for them to mobilise deposits.
Smalls saving schemes include Post Office Monthly Income Scheme (MIS), PPF, Post Office Fixed Deposit Scheme, Senior Citizens’ Savings Scheme, Post Office Savings Account and Sukanya Samriddhi Account.
The distortion, according to banks, occurs when PPF fetches an interest rate of 8.7 per cent while Senior Citizens Savings Scheme offers 9.3 per cent. In contrast, SBI’s 5-to-10-year deposit offers only 7.25-7.50 per cent return.
Banks claim that if small saving schemes continue to offer higher interest rates, bank deposits will remain less competitive and unattractive.
“Small saving schemes are designed to provide safe and attractive investment options to the public, but an artificially high interest rate on them has lured people to invest in such schemes much beyond what is required for tax saving. The interest rate reduction can help correct that trend,” a government official said.
The government will, however, take the step with utmost caution as the finance minister has already reiterated, the official said.
Finance Minister Arun Jaitley had recently said that the government will look into the issue with “political pragmatism” and bring down interest rates on small savings “cautiously” so as interest of those citizens from the weaker and vulnerable sections are not hurt.
Accordingly, the government may spare the interest rates on Senior Citizens’ Savings Scheme and Sukanya Samriddhi Accounts, treating them as most vulnerable groups.
The Savings Spell
The Centre may cut interest rates on small savings
Move expected to help bank deposits become ‘attractive’
Small saving plans popular among middle-class people