FDs still beat small savings schemes

New Delhi: Bank fixed deposits would continue to remain more attractive for savers than long-term deposits under small savings schemes of post office despite the hike in interest rates proposed by the government panel.

At the current market condition, the term deposit rates are as much as 50 basis points higher than the returns offered by small savings scheme as recommended by the Committee headed by RBI Deputy Governor Shyamala Gopinath.

For instance, five-year fixed deposit rate under small savings scheme will fetch 8 per cent if the government accepts the suggestion of the panel.

However, interest rates offered by the banks for same maturity period is about 8.5 per cent, 50 basis points higher than what has been recommended by the panel recently.

Currently, five-year term deposits in the post offices earn 7.5 per cent.

At the same time, 10-year National Savings Certificate (NSC), a new category proposed by the panel, will provide a return of 8.4 per cent to the depositors, compared to 8.75 per cent offered by the country's largest lender State Bank of India (SBI) for the same maturity.

Interestingly, the difference of rates is wider when it comes to less than five-year fixed deposits.

SBI fixed deposit between three years and five years offers a card rate of 8.25 per cent as against 7.5 per cent to be offered by the product under the small savings scheme.

For two-year term deposits, banks are offering as much as 8.75 per cent as compared to 7.2 per cent proposed under the small savings scheme.

Lower returns provided by small savings scheme has resulted in the shift towards the bank fixed deposit schemes.

This is evident from the fact that rate of growth of bank deposits are higher than the small savings scheme.

For example, bank deposit rate registered a growth of 17.2 per cent and the outstanding deposit stood at Rs 44,92,826 crore in 2009-10 as against 8.8 per cent growth witnessed under the small savings scheme in the same year.

The outstanding deposit was 7,28,447 crore at the end of March 2010.

Source: Financial Express