Why A National Saving Scheme?

Published : 2 June 2016, 06:59 AM
Updated : 2 June 2016, 06:59 AM

There is a sustained campaign from certain quarters against the popular National Savings Certificates (NSCs) scheme of the Department of National Savings (DNS), ostensibly because of it paying higher interest rates than the market rates on similar deposits. It is further alleged that these high rates are preventing the market deposit rates, and hence the lending rates, from falling. Even though the evidence throws some doubt on the plausibility of the argument, it is still advanced frequently in an attempt to weaken the rationale for the introduction of this major instrument of government borrowing.

National savings certificates are a saving scheme for the small savers. DNS explicitly states that bringing the small savers under this scheme is one of its goals. Another important goal is to provide a social and financial safety net for certain groups of people viz. women, retired government employees, senior citizens, non-resident Bangladeshis and physically challenged people.

To ensure that the scheme attracts mainly modest savers, the maximum investment in NSCs has been set at Tk. 3 million per person. Two schemes introduced in more recent years have higher ceilings: the family option has the ceiling set at Tk. 4.5 million, while the ceiling is Tk. 5 million for public sector pensioners aged above 65 years. The NSC scheme is designed for mainly low and middle income people, pensioners and housewives.

According to a Bangladesh Bank sample survey report released in 2013, the average monthly family income of the investors in NSC scheme was Tk. 28,770. The lowest 45 percent of the investors had an average income of less than Tk. 20,000. Those who had income exceeding Tk. 30,000 constituted 31.5 percent of the investors. The average investment of the majority of investors, 54.7 percent, was no more than Tk. 0.5 million, while another 20.7 percent had investment of Tk. 0.5 – 1 million. Only 24.6 percent had invested more than Tk. 1 million in NSCs. These numbers leave no doubt that most of the investors in NSCs were of fairly modest means and their average NSC investment was also quite small.

The survey also found that 42.09 percent of the investors were 40-56 years old and 35 percent were of age 57 years or more (26 percent above 60 years). The rest were less than 40 years old. Of the total investors 34.1 percent were housewives and 25.1 percent were retired employees and 21 percent currently employed people. The investors were fairly well distributed between the genders with women accounting for 47.5 percent of the investors. These numbers suggest that the scheme is successful in attracting the kind of people it wants to and in the right proportion.
Since the scheme does not prohibit the participation of any person by income, rich people could also invest in NSCs. However, the ceiling ensures that they cannot invest any more than a small part of their wealth in this scheme and hence, interest income from NSCs cannot be more than an insignificant part of their total income. While some may feel that it is not right to have these people in the scheme, excluding them could be costly in terms of monitoring costs.

The safety net character of the scheme dictates that it yields significantly higher interest rates than the commercial deposit rates. Otherwise it would be needlessly costly to have it. The NSC interest rate that is most often quoted in discussions is the highest rate for deposits of 5 years. However, a large number of the investors withdraw money before the end of the term and receive a lower return. Furthermore, no interest is paid unless a full year is completed and the interest is not compounded. When these are taken into account the average interest rates on NSCs are lower. We do not have readily available data on interest payments made by DNS to estimate an average rate. A rough guess would be that there is a premium of about 2 percent on the NSC rates in comparison with the market rate. There is also some tax advantage in investing in NSCs.

The total amount of saving certificates outstanding as of February 2016 was Tk. 124,965 crore. If the government had paid 2 percent higher interest on these certificates, it had paid Tk. 2,499 crore more than what it would have paid if the interest rate were the same as the market rate. Assuming that the average investment in saving certificates was 0.8 million taka, there were 1.6 million investors in this scheme. If so, the extra interest was distributed among these many people. The government essentially paid a subsidy to these people to encourage them to subscribe to its savings scheme. Given the aims of the scheme, it is arguably a defendable policy decision.

If the concern is that many undeserving people are obtaining this benefit, the solution is not penalising all the deserving people in a knee-jerk reaction, but to work out how the former may be excluded. It is not impossibly difficult to design a process that will minimise the problem without imposing too high a cost.

Another argument sometimes advanced is that the high rates on the saving certificates prevent the other rates from declining. This apparently plausible argument should be viewed with some caution. It would have been true if the savings certificates were two-way perfect substitutes of bank deposits. Indeed if they were, the government would not have been able to maintain the interest differential. Savings certificates are perfect substitutes of deposits of banks and financial institutions when the deposit rates are equal to or higher than the NSC rates, but the converse is not true. If the deposit rates are higher than the NSC rates, few investors, rich or poor, would be interested in subscribing to this scheme. But when the NSC rates are higher than the deposit rates all depositors cannot switch to the scheme because of the ceiling. The amount by which the subscription to the NSC scheme increases is not sufficient to make a significant change in the deposit rates. This allows the maintenance of the interest differential. The presumed high interest on the NSCs did not prevent the banks and other financial institutions from slashing their deposit rates recently under the pressure of excess liquidity, neither did the large reduction in deposit rates cause large-scale switching to NSCs. If the government suitably tightens the subscription rules for its savings scheme to restrict the beneficiaries to the desired groups only, the substitutability and switching of funds could be further reduced.

Since the scheme is a deliberate policy decision of the government it will not be appropriate to judge it in terms of only market outcomes. Any cost benefit analysis must bring to the fore the reasons why the subsidy is given. The government provides subsidies and incentives to various groups including those in its savings scheme for various reasons. If some subsidies and incentives are distorting the market and also not meeting the original objectives of the government, or if there are better ways of achieving them, then the termination or adjustment of the subsidies can be justified. But advocating the termination of a particular subsidy without any analysis of its efficacy in realising the broader objectives for which it was instituted is disingenuous.