The finance ministry’s gaffe on small saving interest rates has brought the spotlight back on whether they pose a challenge to banks in bringing down their deposit and lending rates.

Administered interest rates on small savings are linked to market yields on G-secs, fixed on a quarterly basis at a spread of 0-100 basis points over and above G-sec yields of comparable maturities.

Opinions remain divided on whether the rates need to be cut.

Bankers feel the easy liquidity conditions do not merit the small savings rates to be above the market rates.

However, there is another view which points to the reliance of senior citizens on the small savings schemes and the government should tread carefully to bring down the rates only in small quantities.

Over the past couple of years, both the lenders and the Reserve Bank of India (RBI) have called for greater cuts in the small saving schemes as the high rates have impeded the banks in the transmission of the interest rate reductions by the central bank.

Banks claim they are the direct rivals to the small saving schemes and there is a point below which they are unable to reduce their deposit rates, impacting the monetary policy transmission.

In 2019, Kotak Mahindra Bank chairman Uday Kotak had called for a cut in the small savings rate as the banks are engaged in an unequal battle with them.

The RBI in its monetary policy report had pointed to the impact of the high small savings rates on PSU banks as they also depend on retail term deposits.
Speaking to The Telegraph, Ananth Narayan, professor-SPJIMR, said small saving schemes do pose a problem for banks .

He said the development should be seen in the context of the huge borrowing programme of Rs 12.05 lakh crore in this fiscal even as the RBI has been attempting to keep interest rates under check through various means.

However, inflation has been inching up and this is bad news for the savers. “While bankers are ruing about such schemes, why is nobody crying about the savers’.’

V.G. Kannan, former chief executive of the Indian Banks Association (IBA), admitted the small saving schemes form only a small part of the total bank deposits.

Kannan, however, said one cannot have rates that are “substantially higher” than bank deposits.