Regular income makes MIS most popular small saving instrument
Now that the government has set up a review committee to rationalise the interest rate on various small saving schemes and to assess whether some of them have outlived their utility.
By Tushar K Mahanti, TNN |
Now that the government has set up a review committee to rationalise the interest rate on various small saving schemes and to assess whether some of them have outlived their utility (ET October 10), Indian households are feared to face the problem of saving options once again. As the fall in interest rate of bank deposits made them less lucrative, households were relying largely on small saving instruments for a decent return on their investment.
The rise in stock prices in recent months may have encouraged foreign financial institutions to pump in more funds in Indian bourses, but households back home are still nervous to put their money in stocks. They are worried about its long term sustenance and are instead, perking their funds in secured saving instruments.
During the last decade, between 1994-95 and 2004-05, the small collections have grown by an annual compound rate of 16.4%. The outstanding funds under these schemes have grown by about 19% annually during this period. During the first quarter of the current year, small saving collections have increased by 13% over the corresponding period of last year.
Interestingly, the collection of small savings has grown briskly during last decade despite a fall in interest rate. As such, a fall in interest rate was expected to lower the saving propensity, but in reality the opposite has happened. A fall in interest rate has led to an increase in savings.
This, of course, is not surprising. The large scale retrenchment in the nineties and the resultant future uncertainty has greatly enhanced the saving propensity of Indian households. And a fall in interest rate has compelled them to increase the amount of savings too. As the actual return on savings declines due to a fall in interest rate, households are forced to increase the amount of savings so as to maintain the flow of return at the same level as earlier.
That Indian households are opting for small savings instruments is understandable. After all, for an average individual whose top priority is safety, there are few other saving options, which are equally easily accessible. Besides, interest rate in other savings instruments too has fallen, following the cut in the interest on small savings.
What is significant, however, is that unlike in the past when various tax savings instruments accounted for the larger part of the small savings collections, the saving instruments which give a steady flow of regular income has become the biggest grosser now. The Post Office monthly income scheme (MIS) for example, which accounted for just about 8.9% of the total collections a decade ago, in 1994-95, accounted for 30.6% of the aggregate small saving collections last year. In actual terms, collections under this scheme has grown by 31.7% annually compounded, during this period. The outstanding funds in MIS has grown by 35.6% annually.
Higher interest rate apart, the rise in MIS collections has in fact, been influenced greatly by individual���s need for regular income flow.This is evident in the falling share of Kisan Vikas Patra (KVP), another very popular small saving scheme. The share of this scheme in total annual collections of small saving has fallen steadily over the last decade from 39.5% in 1994-95 to 14.8% last year. The share of outstanding funds under this scheme in total outstanding small savings has fallen from 41% to about 29% .
Actual collections from KVP has grown by just about 5.5% annually compared to 31.7% rise in MIS and 18.6% rise in aggregate small saving collections. Clearly, household savings is now guided more by the need for a regular flow of income, rather than to multiply the money or to meet future exigencies.
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