Poor response to 5-year deposits

The five-year tax saver deposit product introduced by Finance Minister P Chidambaram in 2006 budget has got luke warm response from customers. This is despite the fact that banks are offering interest rates in excess of 9 per cent.

The deposit product was launched by banks at a time when they where struggling to garner deposits to fund the huge credit demand. According to the budget announcement Chidambaram had included bank deposits with a five-year term under Section 80C of the Income-Tax Act subject to the overall limit of Rs 1 lakh.

The Indian Banks' Association (IBA) has raised the issue with the finance minister. The association had asked the FM to consider reducing the tenure of the deposit to three years and introduce the option of premature withdrawal. "We had suggested that the customers that opt for a premature withdrawal should not be given the tax benefit. However, the FM did not consider it in the budget," said a senior IBA official.

"This scheme has failed to draw funds as no investor wants to lock his funds for five year. A customer cannot get a loan on the product either. There's no liquidity for an individual," said chief general manager retail, of a public sector bank.

"The tax saver scheme has not received a great response. The mobilisation of funds under this scheme is very modest. This is largely on account of the tenure. Individuals are not ready to lock in funds in longer tenure instruments. At present, mutual funds also have a lock in period of up to three years," said a private sector bank, retail head.

The average age of a tax payer has come down to around 25 to 26 years. The younger generation prefers to invest funds in shorter tenure instruments with higher returns. Majority of the public sector banks have been able to mobilise a maximum of around Rs 25 crore. Some bank executives are not willing to discuss quantum of funds mobilised considering the lukewarm response.

"This scheme was launched in 2006, we have been able to enroll around 5000 customers with a deposit base of around Rs 8 to Rs 9 crore. We hope that the mobilisation will improve as March 31 is round the corner," said a private sector bank retail head.