VICTIM OF RATE WAR: Savings Bank counter at a Head Post Office in Chennai. Postal savings are a preferred mode of investment for senior citizens. — FILE PHOTO

KOLKATA: The interest rate war unleashed by banks has cast its shadow on post office small savings, where a spate of premature withdrawals are in the offing as many scramble to make their money earn more with a guaranteed return.

The instrument which is taking the maximum beating is the monthly income scheme (MIS), which till the other day, along with the Senior Citizens scheme, was the senior citizen's main source of income, especially if he was the risk-averting type. "Over the last few weeks many post offices have received a spate of applications asking for premature closure of investments, especially MIS", a postal department source said.

In West Bengal, where most people are still not comfortable putting their money in shares, small savings has been a clear winner for many years with the state generating the highest collection figure, followed by Maharashtra. An official at the National Savings Institute's (NSI) Mumbai branch confirmed this trend, saying that other than MIS, which offers eight per cent rate of interest over a six-year period, Kisan Vikas Patra, which doubles money in seven years and eight months is also witnessing waning interest. (NSI is the new avatar of the National Savings Organisation or NSO after it took up training as part of a restructuring exercise in 2004.

In the case of MIS, premature withdrawals are not allowed within a year. Between one and three years, a deduction of two per cent is made from the principal while after three years only one per cent is deducted. Sources said that MIS lost a bit of its sheen since the withdrawal of the bonus facility from February 13, 2006. It now looks definitely lacklustre after the high rates being announced by the banking sector, some of whom are actually nudging double-digit interest rates.

Capital market

An official at the NSI Mumbai told The Hindu over phone that withdrawals (on maturity and premature ones) had shaved off nearly two-thirds of the gross collections made in the first three quarters of the current fiscal. He said people in India's financial capital had already started parking their funds in either the share market or in mutual funds.

Against a gross collection of Rs. 15,560 crore and a net collection of Rs. 7,182 crore between April and December 2005, gross collections dipped by nearly Rs. 300 crore, in the same period in 2006, to touch Rs. 12,803 crore while net collections were Rs. 4,480 crore.

In West Bengal, post offices have started receiving withdrawal applications. However this is yet to reflect in the figures. Between April and December 2006, West Bengal's net collections stood at Rs. 7,500 crore against a gross collection of Rs. 16,441 crore, sources at NSI said. An agent whose small savings generation was about Rs. 5 lakh annually, confirmed that in 99 per cent of cases, reinvestment of matured instruments was not being preferred.

However, sources said either re-routing of investments or abstaining from making fresh investments in small savings instruments would be essentially an urban phenomenon, since the post office is still the preferred destination for savings in the rural areas.

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