It is not too complicated to understand why the small savings are so popular in the public realm. Interestingly, many of the products like SSY and PPF are also very popular among the high-net-worth individuals. That is due to confluence of 3 factors. Firstly, there is the better than market rates of interest that is paid out on these small savings instruments. The second factor is the government backed guarantee, but above all, it is the tax benefits that makes them so attractive. 

An individual is allowed to invest up to ₹1.50 lakhs in PPF each year. They can have multiple members, each having a PPF account, so the limit goes up. Let us look at the benefits, apart from the sovereign guarantee. The yield on PPF at 7.1% is higher than what you earn on a 10-year government security. But, the real edge comes from the tax shield. In the case of PPF, contribution qualifies for Section 80C and interest is tax-free. In short, if you are in the 20% tax slab, effective yield is 11.09%, and if you are in the 30% tax bracket, then effective yield is a jaw-dropping 12.68%. That is an incredible return on a safe product! 

The immediate impact that high rates of return on small savings have is to make other debt products like bonds, bank FD etc. less attractive. In fact, one of the reasons many banks cite for the deposit base not picking up is the high yield on these small savings scheme. Most of the investors find the small savings schemes a lot more attractive compared to the bank FDs. These bank FDs, not only pay lower rates of returns, but the interest is also fully taxable in the hands of the depositor. Even in the case of the 5-year FDs, where Section 80C is available, it still loses out as the interest is taxable. Most debt market players also complain that such high rates on smalls savings and tax shields, distort the yield curve. 

In India, small savings is not just about competing with bank deposits, but it is about paying safe returns to the small investors in uncertain markets. Any cut in the rates of interest beyond a point also has political implications. Hence, it is the endeavor of the government to keep the small savings a few notches more attractive than other bonds, so the small long-term deposits of the people are not only safe, but also lucrative. The reality is that small savings rates have always been high and bank deposits did grow even in such conditions. Probably, banks need to get to the root cause, than just blame small savings rates!