Small Savings

Small savings schemes offered through post offices had fallen out of favor of investors and had seen massive withdrawals when sensex was surging. With the stock market down, they are finally seeing significant growth. There has been a reversal in the trend of withdrawals surpassing deposits in these schemes that were once the middle class staple.

There were huge withdrawals from the traditional piggy bank schemes forcing the Nagpur headquartered. National Savings Institute (NSI) to pull up its socks, NSI, and undertaking of the Union ministry of finance manages the small savings schemes sold through post offices. It offers a peak rate of 9% that too only to senior citizens. What it also offers is rock solid safety, even higher than bank deposit, as small savings are underwritten by the government.

Just months ago, common investors were fast discarding the small savings. A whopping Rs 113,505 crore were withdrawn from the schemes as on January 2008. This amounted to a negative growth of 131.54% in net accretion. Withdrawals had surpassed deposits by Rs 10,230.06 crore. Now, net collections in the post office schemes up to August have seen a growth 156% as against a contraction in the same period last year, say sources.

Officials, however say that the rise in small savings kitty cannot be directly linked with fall in stock market. They say the growth has come from tapping a whole new breed of investors from rural areas who were otherwise aloof from any kind of savings products. Even soldiers especially those in the forward areas, were motivated to park money in these schemes leading to a mop up of over Rs 300 crore.

The money collected through these schemes forms the National Small Savings Fund that has a corpus of over Rs 6 lakh crore. It is used for granting long term loans to the state governments at an interest rate of around 9.5%.

Earlier, even state governments were not keen on borrowing from it as they could raise cheaper funds in open market borrowings. The interest rates in the open markets have hardened. However, the state governments are yet to show keenness for NSI funds.

There has been a gross collection of Rs31,600 crore, Rs 43,900 crore and Rs 68,000 crore during June, July and August 2008 respectively. The net collection which is arrived at after deducting withdrawals, stood at Rs 957 crore, Rs 700 crore and Rs 4,000 crore for these three months respectively. The figures for September and October are yet to come in.

There was a dismal performance in the same months the previous year. The gross collections for June, July and August stood at Rs 31,000 crore, Rs 42,000 crore and Rs 58,000 crore respectively. The withdrawals were more than the deposits by Rs 3,209 crore, Rs 4,500 crore and Rs 7,200 crore, respectively.

The highest rise now has been in the post office savings bank, which has grown by 35% followed by recurring deposits (21%) monthly savings scheme (19%) and national small savings certificate (6%).

A liquid fund is a mutual fund that invests only in money market and short term debt instruments whose tenure is generally less than 1 year. Its portfolio thus comprises instruments such as commercial papers, treasury bills, certificates of deposit, repos, etc. These funds aim at preserving the capital and yielding a conservative return by investing in shorter-term maturity papers, since they are less impacted by the interest rate movement.

At the end of Aug ‘06 the total amount of assets under management by liquid funds was in excess of Rs. 120,000 crore. This constitutes around 42% of the total assets under management by mutual funds.