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Institutions For Saving And Investment

§ 1. The nature of saving. § 2. Economic limit of saving. § 3. Commercial bank deposits of an investment
nature. § 4. Investment banking and bond houses. § 5. Savings banks in the United States. § 6. Security
for thrift. § 7. Postal savings plan. § 8. Advantages and limitations of postal savings. § 9. Collection of
savings and education in thrift. § 10. Building and loan associations. § 11. The main features. § 12. The
continuous plan. § 13. The distribution of profits. § 14. Possible developments of savings institutions.

§ 1. The nature of saving. The motives actuating different classes of lenders may, for our present
purpose, be reduced to two: to postpone the expenditure of income, and to obtain a net income from
wealth (or investment). Saving always is relative to a particular period and is for more or less distant ends.
The child saves its pennies to go to the circus next week, the working girl saves her dimes for a new hat
next spring, the earnest high-school pupil saves to go to college next year, and the provident man saves
for his family's future needs and for his own old age. But always, to constitute saving, there must be for
the time a net result : the excess of income over consumptive outgo in that period. This is easily
distinguishable from various forms of pseudo-saving of which many persons who are really spending all
their incomes are very proud. Such forms are: planning to buy a particular thing and then deciding not to
do so, but buying something else; finding the price less than was expected, and thereupon using this so-
called saving for another purpose; spending less than some one else for a particular purpose, such as
food, but offsetting this by larger outlay for another purpose, such as clothing; spending all one's own
income, but less than some one else with a larger income. We may define saving as the conversion, into
expenditure for enjoyable use, of less than one's net income within a given income period.

Saving goes on in a natural economy both by accumulation of indirect agents and by elaboration so as to
improve their quality.1 It goes on to-day by the replacement of perishable by durative agents, as in
replacing a wooden bridge by one of stone or concrete, and by producing wealth without consuming it, as
in increasing the number of cattle on one's farm. But saving has come to be increasingly made in the form
of money (or of monetary funds), and in this chapter we shall consider some of the ways in which this can
now be done.

§ 2. Economic limit of saving. There is an economic limit to saving, as judged from the standpoint of each
individual.2 The ultimate purpose of every act of saving is the provision of future incomes, either as total
sums to be used later, or as new (net) incomes to be received at successive periods. The economic limit
of saving in each case is dependent upon the person's present needs in relation to present income and
conditions, as compared with the prospect of his future needs in relation to his future income and
conditions. Each free economic subject must form a judgment and make his choice as best he can and in
the light of experience. There is no absolute and infallible standard of judgment that can be applied by
outsiders to each case. Yet there is occasion to deplore the improvidence that is fostered and that
prevails, especially among those receiving their incomes in the form of wage or salary. Considered with
reference to the possible maximum of welfare of the individuals themselves, the apportionment of their
incomes in time is frequently woful. It is uneconomic for families of small income to save through buying
less food than is needed to keep them in health; but it is likewise uneconomic to spend the income, when
work is plentiful and wages good, for expensive foods having little nutriment, and then, for lack of savings,
to go badly underfed when work is slack and wages are small. There is for each class of circumstances a
golden mean of saving. The saving habit may develop to irrational excess and become miserliness but
this happens rarely compared with the many cases where men in the period of their largest earnings
spend up to the limit on a gay life and make no provision for any of the mischances of life - business
reverses, loss of employment, accidents, temporary sickness, permanent invalidity, or unprovided old
age. Despite the development of late of new agencies and opportunities for saving, there is need of doing
more toward popular education in thrift.3

1 See Vol. I, chs. 9 and 10.

2 See Vol. I, pp. 285-290, for the analysis of saving from the individual standpoint; and pp. 482-499 for its
relation to general economic conditions.

It has been estimated that the net annual investment fund of the United States is on the average about
fifteen per cent of net incomes. The annual savings in the years just preceding 1914 were probably three
billion dollars, and in 1919, an especially prosperous year, about ten billion dollars. Of course, as the
amounts are expressed in terms of dollars, changes in the totals must be interpreted in connection with
the changing price levels.

§ 3. Commercial bank deposits of an investment nature. If a commercial bank pays no interest on

demand deposits there is no motive for the depositor to keep a balance larger than he needs as current
purchasing power. When his bank account increases beyond that point, it becomes available for a more
or less lasting investment to yield financial income. If the sum is small, or if the owner is at all uncertain as
to his plans, or if he is not in a position to find another attractive form of investment, the offer by the bank
of a small rate of interest on special time deposits (2 or 3 per cent is not an unusual rate in such cases)
will suffice to cause him to leave such funds in the bank. Since about 1900 the practice has been greatly
extended of paying interest even on "current balances" of regular checking accounts (demand deposits).
If the 3 per cent rule 4 as to reserves against time deposits operates to cause commercial banks
generally to pay a rate ranging from 2 1/2 to 3 1/2 per cent on time deposits, their amount will greatly
increase. But still, in the future as in the past, those depositors having funds that can be invested for
considerable periods will seek a higher rate of interest than can be obtained from commercial banks.

» See Vol. I, p. 484.

In their lending function the "commercial" banks (as the adjective indicates) serve mainly the special
needs of the commercial elements of the community - business men borrowing for short terms to carry
out particular transactions. Loans made on short-time commercial paper (quick assets) are very suitable
to the needs of a bank that has its liabilities largely in the form of demand deposits. Time deposits can be
more safely lent on the security of real estate and for longer periods. Despite their limitations in this
respect, the commercial banks must be recognized as of growing importance in the work of encouraging
and collecting small savings, which in many cases are better invested in other ways. In 1916, the
centenary of the beginning of savings banks in this country, a nation-wide propaganda was undertaken by
the American Bankers' Association for the encouragement of savings.

In 1920 the national banks alone had more than 9,000,000 deposit accounts (nearly one half of all their
accounts) on which interest was allowed. Like information is not available regarding state banks (and trust
companies) doing a commercial business, but probably the number is as great, if not greater. If so, there
is one interest-bearing banking account, outside of regular savings banks, on the average, for every
family in the United States. Evidently, in many families there are two or more such accounts.
Savings and investments

Investments could be current or long-term, whereas savings are always of a long-term nature

M. V. Kali Prasad

Deployment of funds can be done in two ways: Investments and savings.

There is no specific definition for the term ‘savings' as it is not a part of business. Accounting Standard 13 defines an
investment to be funds set apart with the objective of growth, security or earnings.

Thus there are three objectives of an investment — growth, security or income.

Investments are classified as current or long-term. Current investments are those held for short periods
(conventionally for less than 12 months) whereas long-term investments are held for longer periods. Savings stand
on a different footing altogether.

Objective: The objective of investment does not exist in the case of savings. The objective of savings is to save for
the rainy day or to meet unforeseen eventualities. A person saving money is interested in the availability of funds at a
future date and earnings from savings become secondary.

Duration: Investments could be current or long-term, whereas savings are always of a long-term nature.

It is only individuals who can save. A business entity does not save. Savings are personal in nature whereas
investments constitute an asset and appear on the asset side of the balance sheet. Savings are properties while
investments are assets.

Regularity: Savings are made over a long period on a regular basis, whereas investments tend to be sporadic in
nature.

Sources: Savings are made out of income while investments can be made out of borrowings also.

Tax benefits: Savings by way of life insurance premium, national savings certificates, etc, are eligible for deduction
from taxable income (if they are paid out of income chargeable to tax) whereas investments are not deductible.

Certainty: There is no certainty that the amount invested would come back, whereas there is no such risk in the case
of savings. Fixed deposits with banks (up to a certain limit) are assured, even if the bank goes into liquidation.
Amounts invested in shares may, at times, have to be written off.

Types of savings

Savings can be made through many ways. It could be by way of bank accounts such as savings bank accounts,
recurring deposits, fixed deposits, etc.

The banking sector offers certain small benefits to savings accounts, which are not available to current accounts,
such as cheque books that are charged for in the case of current accounts but free of charge in savings accounts.
Small interest is paid on savings while no interest is paid on current accounts.

They may also be by way of National Savings Certificates and the like issued by the National Savings Organisation.
Contribution to provident fund during the active life of a person is a long-term savings, which would come in handy
when the person retires.
The income generated out of savings (except for interest on provident fund accounts) is chargeable to tax. Specific
exemptions have been provided for in the Income-Tax Act for the earnings from life insurance policies making the
maturity value of insurance policies as also the periodic money back received from insurance exempted from the tax
purview.

Types of investments

Investments could be fixed income yielding investments such as bonds and debentures. They may also be fluctuating
income yielding investments such as investment in shares and mutual funds.

AS 13 also provides for “investment property”, where investment could be in the form of real estate. Where an entity
acquires landed property out of its disposable funds with a view to dispose it of at a profit at a later date, it qualifies to
be investment property.

The resolution passed for such acquisition should specify it to be investment property.

In such a scenario, the property so acquired will be disclosed under the head “investments” and not under the head
“fixed assets”.

It being so, the entity cannot charge depreciation on this property as it is not an asset. But if the entity decides to
utilise the “investment property” as a business asset, the property ceases to be an investment and should be
disclosed under the head “fixed assets”. In such a case the entity is entitled to claim depreciation on that property
from the time the asset is first put to use.

Is FD an investment?

A business entity cannot categorise its fixed deposits with banks as investments. A fixed deposit is made for a
defined period of time. This deposit could be taken to meet a business exigency or when the funds are not
immediately required. The objective of investments is absent in the case of a bank fixed deposit. No doubt, the fixed
deposit yields certain income. The deposit is not made with the objective of earning income or for growth.

The Companies Act also prescribes fixed deposits to be disclosed under the head cash at bank on deposit accounts
under the head ‘current assets, loans and advances' and not under the head ‘investments'.

But it may not be so in the case of an individual. The person may put the retirement benefits into a fixed deposit with
a bank and live on the interest so generated by the deposit. Under these circumstances, the objective is earnings and
sense of security, which qualifies to be an investment.

Generally, fixed deposit qualifies to be savings. Considering this, the I-T Act has clubbed fixed deposits for a period in
excess of five years to be eligible for deduction under Section 80C.

Life insurance premium

The objective of life insurance premium is for the protection of the survivors in case of death of the assured. Premium
is paid over a long period of time to converge in to a lumpsum at the end of the term of the policy.

Insurance premium is paid out of the earnings of the person. Therefore, it is more of savings than investment, though,
it is arguable that it provides security and hence is an investment.