PSU Bank
PSU BankReuters

Despite the government cutting interest rates on several small savings schemes, banks have decided to wait for the Reserve Bank of India's (RBI) monetary policy next month before passing on the benefits to consumers, Press Trust of India reported. 

"There is possibility of rate cut by banks after changes made by the government on small savings rate," said Bank of Maharashtra chairman and managing director Sushil Muhnot to PTI, referring to often toed line by banks. "But most of the banks would take a decision in this regard after RBI policy," he added.

Rate cuts on many of the government's small savings schemes had been a long-pending request from the bankers to help effective monetary transmission. It would help the flow of money rightly to the banks and not to post offices, chief of another public sector bank told the news agency, explaining how the government had unviable high interest rates luring away its customers.

For example, in one of the government schemes called the one-year post office deposit scheme, interest rate has been reduced to 7.1 percent from 8.4 percent, while State Bank of India (SBI) pays 7.25 percent for fixed deposits between one year and 455 days, said PTI.

Shaktikanta Das, economic affairs secretary, however, called the government's action of cutting rates as a "normal exercise of resetting" in the month of March annually. "This will enable banks to consequently reduce their deposit rates and extend loan and credit to public and borrowers at lower rates," he said.

The cost of funds will now be cheaper for banks given that the governments' schemes may not pay high interest, PTI referred to the RBI governor's reaction to rate reduction on small savings like PPF and Post Office deposits.

Reuters reported March 19 that Finance Minister Arun Jaitley cut interest rate catering to millions of small savers in about $130 billion of federal deposits in India as a follow up to the RBI's policy rate reduction of 125 basis points in 2015. However, Indian banks had complained that "they could not cut their retail deposit and lending rates substantially when the small savings schemes offered higher rates."

The blame game had in fact slowed the process of banks passing through the benefits of a rate cut by the RBI to economic activities of the country. PTI added that banks lending rates stood at 70 basis points as against the 125 basis points of the policy rate reduction by the RBI. 

The government's move has now created more space for the RBI to reduce their policy rate, bankers told PTI.

Government's Small Savings Scheme New Rates Old Rates
Public Provident Fund 8.1% 8.7%
Kisan Vikas Patra 7.8% 8.7%
Senior Citizen Deposits 8.6% 9.3%
One Year Term Deposit (Post Office) 7.1% 8.4%
Two Year Term Deposit (Post Office) 7.2% 8.4%