RETAIL INVESTOR INTEREST SHIFTS TO BANK DEPOSITS FROM SMALL-SAVINGS

Retail investors are diverting a larger proportion of their holdings in small-saving schemes, mainly post-office instruments, to bank deposits.

The shift is prompted by the attractive rates of interest on bank deposits, after banks raised rates in recent months. The behaviour reinforces a phenomenon of savers actively scouting for better returns and shifting their surpluses in tune with the changing rates in recent years.

Provisional data until February 2011 released by the Reserve Bank of India last week show that small-savings schemes collected Rs 218,744 crore since April 2010, registering a modest growth rate of 15 per cent year-on-year compared to 47 per cent in 2009-10. Such schemes raked in Rs 215, 559 crore in 2009-10.

With bank deposits turning attractive once again in 2010-11, outstanding deposits grew 16 per cent year-on-year to about Rs 52-lakh crore as at March-end 2011.

Outstanding investments in small-savings schemes as at February-end this year grew just 6.8 per cent to about Rs 6,16,700 crore.

That investors are comparing bank deposits to small-savings schemes and frowning on the latter is also evident from the 12.5 per cent fall in the contribution to post-office Time Deposits this year. They offer returns between 6.25 and 7.5 per cent in the 1-5-year maturity period, while banks offer between 7.25 and 9.75 per cent. In 2009-10, when bank-deposit rates were not attractive, post-office deposits saw inflows expand 28.5 per cent. Similarly, in 2008-09, when bank rates ruled high, receipts under this scheme fell 5.6 per cent.

With interest rates declining and tax benefits on the interest payouts gradually being withdrawn, inflows into small-savings schemes have slowed in the past few years. From about 29 per cent year-on year growth in 2002-03, growth in new investments declined steadily to 9.4 per cent in 2005-06 before becoming negative in the two years that followed. Since then, with the exception of 2009-10, growth has not been at earlier levels.

Waning interest

Data available on financial savings of the household sector (gross) in the RBI annual report also point to the waning interest in small-savings schemes. From about 19.6 per cent of total household financial savings in 2004-05, share of investments in small savings had declined steadily to 1.4 per cent in 2008-09 (latest available data). The report of the committee — ‘Comprehensive Review of the National Small Savings Fund' — submitted recently to the Government also shows how growth in outstanding aggregate bank deposits has outdone growth in outstanding small-savings collections every year since 2005-06

SOURCE: http://www.thehindubusinessline.com/industry-and-economy/banking/article2116055.ece