The Reserve Bank of India (RBI) has said that rate hike on some small savings schemes for this quarter may make it difficult for banks to mobilize deposits and may force them to raise rates.
For the January-March 2023 quarter, the government has increased interest rates on eight out of 12 small savings schemes, including an increase of at least 20 basis points (bps) for National Savings Certificate and Kisan Vikas Patra and 110 each for Includes bps higher returns. Fixed deposits of two and three years. One basis point (bp) is equal to 0.01%.
The returns on Public Provident Fund (PPF) and Sukanya Samriddhi Account Scheme were left unchanged at 7.1% and 7.6% prevailing since April 2020. Interest rates on small savings schemes are decided on a quarterly basis with a spread of 0-100 bps. Higher than the yield on government securities of comparable maturity.
The returns for the October to December 2022 quarter were 44-77 bps lower than the formula-determined rates, the RBI said in its October bulletin. PPF and Sukanya Samriddhi Yojana should have earned 7.72% as against 8.22% in the previous quarter, it said.
While it has not shared details in its latest bulletin on how the revised small savings rates align with formula-based returns, the central bank has reiterated its concerns about the implications of these increases for banks.
“An increase in rates on small savings schemes may create competition for banks to raise deposits and may prompt banks to further increase their retail deposit rates,” it said.
When small savings rates were kept higher than formula-based rates until 2021, the RBI has repeatedly pointed to their impact on monetary transmission and the competitive pressures on banks’ ability to increase retail deposits, especially for public sector banks. expressed concern about. RBI bulletins for April, June, July and October made reference to this issue.
In October 2021, it noted: “With the reduction in interest rates on bank deposits and unchanged interest rates on small savings, the latter have become attractive to depositors. The growth in accretion under small savings has consistently been higher than bank deposits since 2018 and the gap has widened with implications for monetary transmission whenever credit demand picks up.
For that quarter (October-December 2021), the returns of small savings schemes were 47-178 bps higher than formula-based rates.