Government is perhaps considering reduction in the rate of interest on savings certificates. This decision may be announced soon after the presentation/ approval of the national budget for fiscal year 2018-2019. The rate of interest may be reduced to a maximum of two per cent. Restrictions may also be imposed on the amount of purchase of savings certificates. Steps may be taken so that savings certificates are not centralised. Quotas of buying savings certificates would be strictly monitored.
Savings certificates are not only a saving instrument but also a means for social safety. People with low incomes as well as pension holders make a living out of the return on the saving tool. This group of people will be hugely affected unless proper alternatives are found.
Government borrowing from savings certificates in huge amount has led to big pressure on the budget for interest payment. Due to this reason, the government may reduce interest rates on savings certificates. The interest rate on savings certificate was last reduced in May 2015.
However, reducing interest on savings certificates will not necessarily motivate people to turn to banks. Public confidence in banks needs to be restored.
At the moment, the government is facing a dilemma regarding the reduction of interest on savings certificates. While private bank owners are pressing the government to cut down interest rates on savings certificates, influential quarters are known to have opposed any such move.
It may not be advisable to reduce interest rate on savings certificates before the next general election as a large section of the population will be affected by the reduced rate of interest. Economically vulnerable people and pensioners invest in savings certificates considering this as 'safe investment'. There is no clear evidence that flow of money in banks will increase if rate of interest is reduced on savings certificates.
There is a crisis of confidence in the banks. If bankers can remove the crisis of confidence, bank deposits will see drastic improvement.
Many people live on earnings from savings certificates. The national savings scheme has been a formidable tool for the social safety net programme of the government. An alternative mechanism to extend financial support to low-income people and pensioners needs to be evolved before reducing the yield rates of saving tools.
Syed Jamaluddin is an economist and columnist
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