Banks gnaw into small savings

Increase in rates since late 2005 brings sheen back on bank deposits.

Banks finally have nothing to complain about the government's small savings schemes. The interest rates offered by banks on deposits have not only caught up with returns on small savings, but have become much more attractive now.

The steady increase in deposit rates since late 2005 has led to flight of savings from the government schemes to bank deposits.

The growth in postal deposits began slowing in early 2006, which led to the growth in small savings falling for the first time in almost five years.

The year-on-year growth in small savings dropped to 14.61 per cent in 2005-06, because of lower accruals in the second half of 2005-06.

In the previous four to five years, the increase in small savings deposits was around 20 per cent. The small savings schemes include postal savings schemes, national savings schemes and public provident fund.

In the first quarter of 2006-07, the growth has further slowed. Postal deposits grew by 11.8 per cent year-on-year (Rs 10,919 crore) up to July 7, 2006 in the current financial year, down from an increase of 23.1 per cent (Rs 17,424 crore) a year earlier.

For over three years, bankers were complaining of how high interest rates offered on government savings schemes were hurting their deposit mobilisation efforts.

Debt market analysts said bank deposits are more rewarding now as the government has also provided tax benefit for deposits of five years and above.

IDBI Bank is offering the highest interest of 8.5 per cent on a five year deposit. The only post office savings schemes which offer tax benefits are national savings certificate (NSC) and public provident fund (PPF). NSC offers 8 per cent interest for six-year term, while PPF provides the same return for a 15 year term.

Kisan Vikas Patra offers 8.41 per cent interest, month income scheme provides 8 per cent, postal term deposits 6.25 to 7.50 per cent for 1-5 years and recurring deposits 7.50 per cent for 5 years.

Bank deposits have grown by 20.7 per cent (Rs 3,72,977 crore) up to July 7 in the current financial year against 15.2 per cent (Rs 2,37,533 crore) a year earlier.

Banks increased their deposit rates by about 25-100 basis points across various maturities between March 2006 and July 2006, apart from some of them launching special schemes offering 8 per cent interest on deposits of 270-390 days.

The outstanding in all the postal savings schemes aggregated Rs 5,24,628 crore at the end of March 2006 against Rs 4,57,732 crore a year earlier.