Small savings dilemma

SBI has already cut its deposit rates by a quarter per cent

Update: 2015-10-02 06:04 GMT
The median base lending rates of banks have dropped by 30 basis points only (Representational Image)

The government proposes to review the rates offered by small savings schemes which, according to banks, make it difficult for them to compete. Their cost of deposits is higher and so they are unable to lower lending rates and pass on the full benefits of the earlier 75 basis points cut by the RBI. They had passed on just 30 basis points.

The banks fear that if they cut interest on deposits further, depositors will flee to the small savings schemes. The small savings schemes like Kisan Vikas Patra, NSS, PPF and post office deposits, offer rates ranging from 8.4 per cent to 9.3 per cent for senior citizens. When asked for details of SSS review, Union finance minister Arun Jaitley asked the media not to “prejudge the issue” and that they would look at all aspects before deciding.

SBI has already cut its deposit rates by a quarter per cent. Justifying the SSS move, analysts say that now that the consumer price index and wholesale price index are at nine-month lows, the real interest rates are positive. Earlier, despite high deposit rates, the real interest rates were lower because the CPI was 10 per cent.
Theoretically this seems logical, but ground realities are totally different. The common man hardly feels the impact of the lower CPI and WPI in his daily purchases, particularly with education, transport and housing costs rising.

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