Small saving schemes: Helping investors of all hues realise their life goals

Walking up the steps of the majestic General Post Office of Mumbai, designed by the Scottish architect John Begg in 1913 in Indo-Saracenic style, with an imposing dome, you’d expect a plush setting inside. This is the Maharashtra headquarters of the national collection agency – popularly known as India Post – called the National Small Savings Fund (NSSF) worth nearly Rs 17.78 trillion, administered by the government of India. Collections made through all small-savings schemes land up in the NSSF pool.

Inside the GPO, it feels like any other government office. Rickety fans making whirring sounds, staff spending more time poring over documents than at their computers. At the spacious section devoted to small-savings schemes, depositors wait patiently for their turn. Most turn up to deposit or withdraw their money or simply update their passbooks. Investments made through post office recurring deposits, time deposits, public provident fund (PPF), senior citizens’ savings scheme (SCSS), national saving certificates (NSC), Sukanya Samriddhi Account (SSA) and so on, land up in the NSSF pool.

Why small continues to be big

Despite a  the massive 70-140 basis points rate reduction across schemes announced on March 31, 2020 and the introduction of the optional new tax regime from April, small-saving schemes continue to remain attractive. Banks’ FD and savings account rates have also been falling after the Reserve Bank of India (RBI) cut interest rates on March 27 to fight the COVID-19 crisis, along with other policy interventions and to boost liquidity.

In fact, even the new tax regime with liberalised rates (and no deductions) will not be a deterrent, feel India Post officials.

“Our customers come to us for the simplicity, safety and high rate of returns that small saving schemes offer. Even if people were to opt for the alternative tax regime, we do not see any decline in inflows into these schemes,” says HC Agrawal, Chief Postmaster General, Maharashtra circle, which currently manages over 2.72 crore accounts across schemes as on January 31, 2020. “We do not record income profiles of our investors, but most would be from low and middle-income groups. Their priority is safety, not tax-saving,” he adds. According to SBI Research estimates, too, less than 10 per cent of the total taxpayers are expected to migrate to the new tax regime as they are the only ones who will be benefited. Therefore, a majority will continue to stick to the old regime and the tax benefit it offers.

Despite competition from other financial investments in investors’ portfolios, small saving schemes have retained their edge on three counts.

The returns are guaranteed. The BSE SENSEX has fallen over 26 per cent from its all-time high peak of 42,273  on January 20, taking its toll on stocks and equity mutual fund NAVs. Even before COVID-19 wreaked havoc on Indian shores, a UBS Global Research survey of over 1,000 respondents had found that ownership for general insurance, post office savings schemes and pension plans had gone up in the second half of 2019, compared with equity/debt mutual funds (MFs) and shares, where it had declined.

Small savings come with a sovereign backing. After seeing a surge in inflows after demonetisation, when bank FD rates nose-dived, debt funds investors were bruised by frequent defaults and credit rating downgrades over the past two years. More stress is expected due to the after-effects of the COVID-19 crisis.

Even banks have not been spared. Depositors’ confidence has been affected due to the Punjab and Maharashtra Co-operative Bank and YES Bank crises. The deposit insurance scheme – which was enhanced in Budget 2020 to Rs 5 lakh a depositor and per bank – is only distributed to an FD/savings account holder if the bank goes into liquidation. That’s something RBI seldom allows. In the meantime, the lockdown on depositors continues, sometimes for months and years.

Even though small saving schemes’ interest rates have been liked to government security yields since 2011 and are reviewed every quarter, rates have largely not been altered in sync with the markets. Experts say it is done to protect small investors. This time around though, the government couldn’t ignore the massive rate cut from the RBI and had to align the rates on small-saving schemes accordingly.

Hold appeal for people of all ages

Pradeep Sali, 60, a Mumbai-based depositor, and Sayali Deodhar, 39, a Pune-based Sales engineer, depend on small-saving investments to plan and fund their retirement.

“SCSS returns are higher than bank FDs, even after factoring in tax impact, though the government must consider making the interest income tax-free,” says Pradeep Sal, 60, Mumbai.

It’s the unwavering trust of such individuals that forms the fulcrum of the burgeoning small-savings kitty.

“PPF is reliable and uncomplicated. I do not want to spend time monitoring – and worrying about - mutual fund schemes’ performance,” says Sayali Deodhar, 40, from Pune.

The net receipts into the NSSF are expected to touch Rs 2.77 trillion in financial year 2019-20, a growth of 30 per cent over the figure of 2018-19.

The Department of Posts and designated commercial banks act as fronts for the fund, collecting household savings from every nook and corner of the country. Post offices collectively account for nearly 82 per cent of gross collections, according to the National Savings Institute’s 2018 annual trends report. The rest comes in through designated banks. “The purpose of offering such schemes was to channelise middle and lower-middle class families’ savings into secure avenues. The aim was to prevent people, particularly those in rural areas, from falling prey to unauthorised schemes,” says Agrawal.

The confidence in these schemes binds disparate saver groups, cutting across age-groups, goals and geographies.

For example, Shruti Patil, a 28-year-old IT professional from Mumbai and Dakshayani Mallappa, 68, a retired school headmistress from Jalihal – a tiny hamlet tucked away in Karnataka’s Bagalkot district – have very little in common. Both, however, resolutely swear by small saving schemes to fund their goals.

“PPF’s 15-year lock-in may be a limitation for some, but I do not find it restrictive as I have tagged it to my retirement goal,” says Shruti Patil, 28, from Mumbai.

While Patil invests in the PPF to save up for her retirement, Mallappa has been investing in a five-year post office recurring deposit. The recurring deposit, incidentally, is the most popular offering, according to Agrawal. In Maharashtra circle alone, 1.5 crore out of 2.72 crore small-saving scheme accounts as on January 31, 2020 were recurring deposits. Maturity proceeds from her recurring deposit have helped Mallappa buy gold jewellery from time to time, besides meeting other short-term needs.

“I have been putting my money in post office RD throughout my working tenure. They are reliable and I get the promised sum on time,” Dakshayani Mallappa, 68, from Jalihal.

Their popularity remains unmatched, particularly in non- metro cities. “Small-saving schemes continue to rule the roost in relatively smaller towns, though we try to get investors to allocate at least 10-15 per cent of their investible surplus to mutual funds,” says Raj Jivrajani, a mutual fund distributor based in Jamnagar. “Queues at post offices do not deter savers.”

Patil has picked PPF as it offers the highest (7.1 per cent), guaranteed interest rate amongst long-term debt instruments. “Besides, it also offers deductions under section 80C, so my annual tax planning, too, is taken care of,” she says. Amongst small saving schemes, five-year post office time deposit, PPF, National Savings Certificate (NSC), senior citizen saving schemes (SCSS) and Sukanya Samriddhi Accounts (SSA) offer tax deductions. For PPF and SSA account holders, the interest earned, too, is exempt from tax – and will remain so even in the alternative tax regime.

Small-saving instruments help investors to save for a bouquet of financial needs. While PPF is geared for retirement or kids’ education, the POMIS helps you earn monthly income. In 2016, a new instrument called Sukanya Samriddhi scheme was offered that helps you save for your daughter’s future. It was a hit. “After the Recurring Deposit, we see maximum interest in this scheme,” says Agrawal. This, despite strict withdrawal restrictions – partial redemptions are allowed only after the girl turns 18.

“High returns and meeting the needs to save for daughter’s education or marriage made this scheme a hit. The long lock-in is not a negative, as the investment is being made for this critical long-term goal. Moreover, it offers flexibility in terms of the amount you can invest every year,” explains Suresh Sadagopan, Founder, Ladder7 Financial Advisories

Financing India’s infrastructure

The NSSF also plays a major role in bolstering the government’s finances every year. “Over the past two years, the government has increased its reliance on small savings for financing its deficit. In FY20, small savings accounted for 31.3 per cent (Rs 2.4 lakh crore) of the overall fiscal deficit and it has been budgeted at 30 per cent for FY21. This was less than 20 per cent in the previous two fiscal years,” Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI, said in a recent report.

Savings that Patil, Mallappa and others direct towards this fund are lifelines for critical infrastructure projects in the country. According to Budget 2020 data (revised estimates for the year 2019-20), the agencies that benefited from the inflows include the Power Finance Corporation (PFC), National Highways Authority of India (NHAI), Railway Finance Corporation and Food Corporation of India (FCI).
“NSSF is used for matching the fiscal deficit without having to resort to market borrowings and is hence useful. It is used also for financing off-budget borrowing such as FCI borrowing from this fund, which does not come into the budget. The cost is higher at 0.5% over the cost of small savings,” says Madan Sabnavis, Chief Economist, CARE Ratings.

So far, small savings have thrived because they offer safety, liquidity and higher returns. Old and aged investors who’ve depended on small savings all their lives don’t mind the long queues, shabbily-kept post offices or the indifferent staff. But India is getting younger and more millennials are entering the work force. Will they trust post offices with their money? Or would they rather invest online in some mutual fund? Watch out for our concluding story.