Post office savings, the new genre

Ramesh Parekh went bankrupt last week and his entire estate including his family home, his three cars, his trading company and equity investments have been attached by the court to pay off debts amounting to Rs 1.5 crore (Rs 15 million).

His wife and children fortunately have his postal savings to fall back upon since the law of the land does not permit investments in postal savings and public provident fund to be attached by any court in the country.

Postal savings, which was once considered to be the ideal investment avenue for the lower middle class and the lower class, is now fast catching on with middle income and higher income groups.

In a falling interest rate regime, postal savings offering returns of eight per cent have attracted huge inflows.

Said postal savings agent Usha Jain: "Overall savings channelled to postal savings has increased by 100 per cent. Many of my clients are traders and high networth individuals who never used to consider postal savings. Today, many swear by this investment avenue".

Hardly surprising in this day and age when postal savings are seen as one of the most secure forms of investment.

Similar to the Life Insurance Company of India, postal savings are backed by the government of India.

Armed with this sovereign guarantee, the government will step in should the postal department ever fail to pay back the returns.

As investment avenues like equity markets, bullion, real estate and fixed income schemes are drying up, postal savings schemes are attracting the affluent class.

Kunal Dasgupta, who burnt his fingers investing in the stock market last year, has decided to put his voluntary retirement fund in the postal department's monthly income scheme.

He put Rs 6 lakh in joint holding in the MIS. For the next six years, he is assured of a monthly return at eight per cent per annum.

The postal department allows maximum of Rs 6 lakh one-time deposit under MIS where it is a joint account and imposes a Rs 3 lakh maximum cap under an individual account.

Once an individual has bought a postal savings scheme, the interest rate is locked in for a period of five to six years depending upon the individual schemes.

This offers greater liquidity to investors, especially since many in the lower income group are not certain about their future monetary needs and hence prefer short-term investments.

What's more, aside from postal savings being a good form of secure, short-term investment, it also offers liquidity in the sense that one can avail of a bank loan against these certificates.

The National Savings Certificate and Kisan Vikas Patra are common schemes against which many loans have been taken.

Some of the postal schemes like the NSC (which offers 7.5 per cent interest) offer tax exemption under section 88 of the Income Tax Act.

This means that the effective interest rate shoots up considerably, but it depends on your investment made and your taxable income bracket.

There is no cap on investment in many of the postal schemes though the tax rebate limit is included within the Rs 70,000 cap.

What's more, as postal savings were initially targeted at lower and middle income groups, there is the five-year recurring deposit scheme that offers eight per cent return.

Investors can thus invest on a month-to-month basis and get a handsome sum at the end of the five-year tenure.

Attractive as all this sounds, the postal department could attract far greater investment in these schemes had it not been for the poor service. The lack of professional servicing is a major handicap.

Employees of the postal department have little incentive to push sales. Moreover, they are not trained and few understand the schemes and the tax implications pertaining to them.

While the postal department has encouraged individuals to take up agencies to hawk the various schemes, proper training is not imparted and hence there are few professional agents.

What the department has failed to realise is that the post offices offer the biggest distribution channel in the country. However, for want of proper servicing it has not been able to maximise business.

At the same time, service or no service, this channel has for a long time been heavily used by many to legalise their funds.

As investment in postal savings takes place mostly in the form of cash, "number two" money (black money) can easily be converted into white.

Postal authorities do not ask any questions as to where the funds have come from. This makes it very easy for any one to invest, anyone with or without a bank account.