Government should remove 15-year lock-in period for PPF: SBI Report

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Government should ideally remove the 15 year lock-in period for PPF and give the investors the option to withdraw their money within a stipulated time with some sort of disincentive, says a study by SBI Research.

One of key components of financial savings for households in India is small savings, the rates of which administratively determined. PPF is a government-backed, zero-default risk, long-term small savings scheme akin to quasi floating rate deposits with the objective to provide retirement security to self-employed individuals and workers in the unorganised sectors. The small savings schemes rates are adjusted in every quarter, the government should consider removing the lock-in period, the study said.

According to the study, post the financial crisis in 2008, there has been a significant jump in preference for post office savings. This jump is maximum in low income states like West Bengal  and even in high incomer states like Maharashtra.

“If we see the trend of last 20 years data on gross small savings collections we clearly see a structural break in 2008-09. In particular, the share of different states in gross small saving collections were declining till the global financial crisis,” the study noted.

The study also reveals that the post-office savings deposits are negatively correlated to per capita income while bank deposits are positively correlated with per capita income. This suggests that poor people are more reliant on post-offices for their savings and when their income rises they shift to bank deposits first instead of financial products.

As per the study, the proportion of post-office deposits in Maharashtra & Delhi, where per capita income is very high is only 60%. However, in states with low per capita income like West Bengal, Uttar Pradesh, Rajasthan and Bihar, the elderly population of 60 years and above has a clear preference to invest in post office saving deposits.

Highlighting the prospective challenge for policy making at social and economic level, the study noted that the share of India’s senior citizen population is seen increasing to 15.9% in 2041 from 8.6% in 2011.