DEPARTMENT OF BUSSINESS ADMINISTRATION UNIVERSITY OF LUCKNOW PROJECT ON SMALL SAVING MARKET THE INDIAN CONTEXT

(Management of Financial Institutions)

Submitted to: Dr. Ajai Prakash Submitted by: Adison Growar Satye MBA-FINANCE Sem-III Batch- 2011-1013

Acknowledgement
I take this opportunity to convey our sincere thanks and gratitude to all those who have directly or indirectly Helped and contributed towards the completion of this project. First and foremost, we would like to thank Dr. Ajai Prakash for his constant guidance and support throughout this project. During the project, I realized that the degree of relevance of the learning being imparted in the class is very high. The learning enabled us to get a better understanding of the nitty-gritty of the subject which I studied. I would also like to thank my batch mates for the discussions that I had with them. All these have resulted in the enrichment of my knowledge and their inputs have helped us to incorporate relevant issues into my project.

jjh`

TABLE OF CONTENT Introduction1 Small Savings Schemes .2 Benefits of savings facilities for the poor.......3 Micro Finance in India4 Current Small Savings Schemes With Main Features.4 Administered Interest Rates.7 Advantages and Disadvantages of Savings Accounts.9 Conclusions.10 Bibliography....10

INTRODUCTION
Small Savings Schemes are implemented through the Department of Posts, and 15 year Public Provident Fund Scheme is implemented through Head Post offices as well as Banks. Deposit Scheme for Retiring Government Employees / Deposit scheme for Retiring Public Sector Employees which also comes under Small Savings Schemes are implemented through State Bank of India in all District Head Quarters. In the present financial market, where a large number of private financial companies have disappeared, Small Savings offer the best and safest avenue of investment of household savings. Small Savings scrips not only yield high returns, but also are guaranteed by Government and thus completely secure.

National Small Savings Fund

Small Saving schemes have been always an important source of household savings in India. (i) postal deposits [comprising savings account, recurring deposits, time deposits of varying maturities and monthly income scheme(MIS)]. (ii) savings certificates [(National Small Savings Certificate VIII (NSC) and Kisan Vikas Patra (KVP)]. (iii) social security schemes [(public provident fund (PPF) and Senior Citizens Savings Scheme(SCSS)]. A National Small Savings Fund (NSSF) in the Public Account of India has been established with effect from 1.4.1999. A new sub sector has been introduced called National Small Savings Fund in the list of Major and Minor Heads of Government Accounts. deposits and withdrawals by subscribers were made from the public account and interest payments to subscribers and interest receipts from the States were recorded in the revenue account of the Consolidated Fund of India.

Administrative

Set-up

The small savings schemes are administered through the agency of post offices. The Public Provident Fund (PPF) scheme is operated through post offices as well as selected branches of public sector banks whereas the Deposit Schemes for Retiring Government and Public Sector Employees are operated through nationalised banks only. These schemes are operated through a network of over 1,54,000 post offices and 8000 branches of public sector banks. As regards GoI Savings Bond, while both RBI offices and agency banks act as the receiving offices for the 6.5 per cent Savings Bonds (non-taxable) 2003, only the agency banks act as receiving offices for the 8 percent Savings Bonds (taxable) 2003.

Page-1

SMALL SAVINGS SCHEMES

Scheme National Savings Certificate Rate Denomination and Investment Limits Minimum Rs.100, No maximum limit, denominations of Rs.100, Rs.500, Rs.1000, Rs.5,000 and Rs.10,000 Minimum Rs.10 per month or any amount in multiples of Rs.5, No maximum limit Minimum Rs.1000, further deposit in multiple of Rs.1000, up to Rs.300,000 in case of individual and Rs.600,000 in case of joint account Minimum Rs. 100, No maximum limit Minimum Rs. 200, No maximum limit Minimum Rs. 50 any further deposit in multiple of Rs. 5 with maximum balance of Rs. 100,000 in case of single account and Rs. 200,000 in case of joint account. In multiple of Rs. 1000 and maximum of Rs. 15,00,000 Liquidity Tax Benefits Section 80C

8.16% p.a. Compounded Half Yearly Rs.10 per month returns Rs.728.90 on maturity

Maturity after 6 years, No premature withdrawal allowed Maturity after 5 years, can be extended for further 5 years One withdrawal up to 50% of the balance allowed after 1 year, closure allowed after 3 years with different rate of interest Maturity period is 6 Years, Premature withdrawal is possible after one year upto 3 years with 5% discount, withdrawal is possible after 3 years without any discount and without bonus.

Recurring Deposit Account

Nil

Monthly Income Scheme

8% per annum plus 10% bonus on maturity

Nil

Kisan Vikas Patra Time Deposit

Money doubles in 8 years and 7 months 6.25 %-1 year 6.50 %-2 year 7.25 %-3 year 7.50 %-5 year

Maturity period 8 years 7 months, premature withdrawal is possible. 2,3,5 years account can be closed after one year with discounted rate of interest, account can be closed after completion of 6 months but before 1 year with no interest

Nil

Saving Bank Account

3.5% per year

Withdrawal anytime without notice.

Section 10

Senior Citizen Savings Scheme Deposit Scheme for Retiring Government Employees 1989 Deposit Scheme for Retiring Employees of Public Sector Undertakings 1991

9% payable quarterly

Maturity after 5 years. Can be extended up to three years after maturity. Account can be opened by single individual who has attened the age of 60 years. Joint account can be opened in the name of spouce only. NRI and HUF account is not permissible. Deposit allowed through agents also.

Taxable

7% per annum. Scheme discontinued from July 2004 7% per annum Scheme discontinued from July 2004

Minimum Rs. 1,000, any amount in multiple thereof, Maximum equal to total retirement benefit

Maturity period 3 years, premature withdrawal possible after completion of 1 year

Section 10

Minimum Rs. 1,000, any amount in multiple thereof, Maximum equal to total retirement benefit

Maturity period 3 years, premature withdrawal possible after completion of 1 year

Section 10

Page-2

Benefits of savings facilities for the poor savings such as credit facilities are important tools for efficient liquidity management. Virtually all people will save in any given time and face a portfolio decision with regards to different savings options. The advantage that deposit facilities show over informal savings is a good mix of accessibility to cash, security, rate of return and divisibility of savings. In-kind savings such as gold, jewellery or livestock require time to be converted into cash. From an institutional perspective, mobilizing small and microsavings can help MFIs to attain self-sustainability. Deposits can be an attractive source of funds as their financial costs are normally lower than funds from the interbank market.

Small savings are also a more stable funding source than donor funds or rediscount lines from the Central Banks. The former are generally independent from political interests. Small depositors, in general, do not intervene in the day-to-day business as most governments and donors do if they provide funds. A similar risk of dependence might also exist with larger savers such as better-off people and institutional savers.

Micro Finance in India

Micro-finance refers to small savings, credit and insurance services extended to socially and economically disadvantaged segments of society. In the Indian context terms like "small and marginal farmers", " rural artisans" and "economically weaker sections" have been used to broadly define micro-finance customers. The recent Task Force on Micro Finance has defined it as "provision of thrift,credit and other financial services and products of very small amounts to the poor in rural, semi urban or urban areas, for enabling them to raise their income levels and improve living standards". At present, a large part of micro finance activity is confined to credit only. Women constitute a vast majority of users of micro-credit and savings services.

Page-3

Mainstream Micro Finance Institutions

National Agricultural Bank for Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), Housing Development Finance Corporation (HDFC), Commercial Banks, Regional Rural Banks (RRBs), the credit co-operative societies etc are some of the mainstream financial institutions involved in extending micro finance.

PROMOTION :
National Savings Organisation (NSO) is responsible for national level promotion of these schemes through publicity campaigns and advertisements in audio, video as well as print media. Through a large network of over 5 lakh small savings agents working under different categories viz: Standardised Agency System (SAS), Mahila Pradhan Kshetriya Bachat Yojana (MPKBY), Public Provident Fund Agency Scheme, Payroll Savings Groups, School Savings Banks

CURRENT SMALL SAVINGS SCHEMES with MAIN FEATURES:

POST OFFICE SAVINGS ACCOUNTS: At any post office Account can be opened with a minimum of Rs. 20. Maximum of Rupees One Lakh for single holder and Rs. Two lakhs for joint holders. If depositors have more than one account (single, pension or joint), the balances or shares of balances in all such accounts taken together should not exceed Rs. One Lakh for each of the depositors. There is no lock-in / maturity period prescribed. Withdrawals: Any amount subject to keeping a minimum balance of Rs. 50 in simple and Rs. 500 for cheque facility accounts. Interest : Interest at the rate (s) as decided by the Central Government from time to time, is calculated on monthly balances and credited annually. Tax treatment: Income tax relief is available on the amount of interest under the provisions of section 80L of Income Tax Act.

Page-4

 POST OFFICE TIME DEPOSIT ACCOUNTS : Types of Accounts: 1 Year maturity, 2 Years maturity, 3 Years maturity & 5 Years maturity A deposit with a minimum of Rs. 200 with no maximum limit. Interest : Interest, calculated on quarterly compounding basis, is payable annually. Tax treatment: Income tax relief is available on the amount of interest under the provisions of section 80L of Income Tax Act. POST OFFICE RECURRING DEPOSIT ACCOUNTS : Sixty equal monthly deposits shall be made in an account in multiples of Rs. five subject to a minimum of ten rupees. POST OFFICE MONTHLY INCOME ACCOUNTS: Minimum: rupees one thousand. Maximum: rupees three lakhs in case of single and rupees six lakhs in case of joint account. Deposits in all accounts taken together shall not exceed Rs. three lakhs in single account and Rs. six lakhs in joint account. Income Tax relief : Income tax relief is available on the interest earned as per limits fixed vide section 80L of Income Tax, as amended from time to time. NATIONAL SAVINGS CERTIFICATE (VIII Issue): Certificates are available in denominations (face value) of Rs. 100, Rs. 500, Rs. 1000, Rs. 5000 & Rs. 10,000. There is no maximum limit for purchase of the certificates. Interest/maturity value : Maturity value of a certificate of any other denomination shall be at proportionate rate.Interest accrued on the certificates every year is liable to income tax but deemed to have been reinvested. Page-5

i.

Income Tax relief : Income Tax rebate is available on the amount invested and interest accruing every year under Section 88 of Income tax Act, as amended from time to time. Income tax relief is also available on the interest earned as per limits fixed vide section 80L of Income Tax, as amended from time to time. KISAN VIKAS PATRA : Certificates are available in denominations (face value) of Rs. 100, Rs.500, Rs. 1000, Rs. 5000, Rs. 10,000 & Rs. 50,000. There is no maximum limit for purchase of the certificates. Tax Benefits : No income tax benefit is available under the scheme. However the deposits are exempt from Tax Deduction at Source (TDS) at the time of withdrawal. PUBLIC PROVIDENT FUND SCHEME : Minimum deposit required is Rs. 500 in a financial year. Interest : Interest at the rate, notified by the Central Government from time to time, is calculated and credited to the accounts at the end of each financial year. Income Tax relief : Income Tax rebate is available on the deposits made, under Section 88 of Income tax Act, as amended from time to time. Interest credited every year is tax-free. DEPOSIT SCHEME FOR RETIRING GOVERNMENT EMPLOYEES : One time deposit with a minimum of Rs. 1000 to the maximum of the total retirement benefits in multiple of one thousand rupees. Interest :Interest at the rate, notified by the Central Government from time to time, is credited and payable on half yearly basis at any time after 30th June and 31st December every year. Income Tax relief : Interest accrued / credited / paid is fully tax-free. Amount deposited under the scheme is free from wealth tax. DEPOSIT SCHEME FOR RETIRING EMPLOYEES OF PUBLIC SECTOR COMPANIES : One time deposit with a minimum of Rs. 1000 to the maximum of the total retirement benefits in multiple of one thousand rupees.

Page-6

Interest :Interest at the rate, notified by the Central Government from time to time, is credited and payable on half yearly basis at any time after 30th June and 31st December every year. Income Tax relief : Interest accrued / credited / paid is fully tax-free. Amount deposited under the scheme is free from wealth tax.

Administered Interest Rates for July 1, 2011 to March 31, 2012 Instrument Current Rate Proposed Rate(%) (%) Savings Deposit 3.50 4.0 1 year Time Deposit 6.25 6.8 2 year Time Deposit 6.50 7.2 3 year Time Deposit 7.25 7.5 5 year Time Deposit 7.50 8.0 5 year Recurring Deposit 7.50 8.0 5-year SCSS 9.00 8.7 5 year MIS 8.00 ( 6 year MIS) 8.0 5 year NSC 8.00 (6 year NSC) 8.0 10 year NSC New instrument 8.4 PPF 8.00 8.2

Page-7

Growth in Small Savings Deposits vis--vis Bank deposits

Page-8

Figure 1: Trends in small saving collections over last twenty year:

Advantages of Savings Accounts

Savings accounts allow you to earn interest on the money deposited. When opening a savings account, there usually are no deposit requirements. You can add money to your savings account without worrying about fees or penalty charges for minimum deposits. Savings accounts that have a balance of up to $100,000 are usually covered by the Federal Deposit Insurance Corporation (FDIC). This means that if the bank closes or fails, you will receive all money you saved in the bank up to $100,000. You should check with your bank to make sure it is covered before depositing money.

Disadvantages of Savings Accounts

The purpose of a savings account is to save money. Some banks only allow a certain number of withdrawals from a savings account within a set time period. Another disadvantage of having a savings account, if you deposit large sums of money, is the balance covered by FDIC. If you save more than $100,000 in one bank and it goes under, you risk losing any funds over $100,000 that was deposited. Low interest rates on savings accounts may not make them a suitable choice for investing. If your plan is to make money off your savings, a better option might be a money market account or certificate of deposit (CD). Page-9

Conclusions:
Financial institutions that want to attract small depositors do not automatically drift away from poor borrowers. Good experience with small depositors can even encourage financial institutions toconsider them as potential borrowers. Small and microsavings are a profitable source of funds if designed appropriately. Empiricalevidence has shown that mobilizing small and microsavings can be a profitable business if built-inincentives instill financial discipline and cost-accountability.

Bibliography:
1) rbidocs.rbi.org.in/rdocs/PublicationReport. 2) planningcommission.nic.in 3) wikipedia.org/wiki/Ministry_of_Finance_(India)

4) .thehindubusinessline.com
5) http://www.moneycontrol.com

Page-10

Page-10