The government is beginning a review of the administered interest rate structure for small savings schemes and plans to set up a committee headed by a former Reserve Bank of India (RBI) governor to suggest a roadmap for possible decontrol.
Sources close to the development said the terms of reference for the review were yet to be finalised, but the broad framework was to work out an interest rate structure that is pro-growth.
Official sources said the government was of the view that while de-regulating, the rates on small savings’ interest rates could either be cut 25 to 50 basis points or linked to the sovereign rate, which is the interest rate on government securities for a specific maturity.
The move follows demands from banks and suggestions from RBI. Administered interest rates for small savings schemes such as the public provident fund (PPF) and post office deposits restrict the ability of banks to lower deposit rates. Given the high cost of funds, therefore, they lack the ability to lower the price of loans.
The interest rate on small savings schemes such as PPF and Monthly Income Scheme was reduced to 8 per cent in 2003 and has not been reviewed since then, mainly on account of pressure from the four Left parties on which the previous United Progressive Alliance government depended for support in the Lok Sabha.
Small savings collections had dropped for two consecutive years because other savings instruments were offering better returns. In 2008-09, however, receipts rose 16.19 per cent to Rs 1,43,668 crore, while outstandings went up 6.86 per cent to Rs 5,44,340 crore.
The review could kick-start a downward bias for interest rates in government securities of the kind that was seen at the start of 2004-05, the sources said. This could also help RBI push for transparency in fixing the benchmark prime lending rates, which are linked to the cost of funds.
To help small investors recoup some of the losses on account of a lower small savings rate, the government could consider re-issuing relief bonds, both taxable and non-taxable, an official said.
TALLYING THE COST
(How interest rates in small savings schemes have moved)
Scheme
Interest rate (in %)
From
Jan ‘01
From
Mar ‘02
From
Mar ‘03
Monthly Income Scheme
9.50
9.00
8.00
Public Provident Fund
9.50
9.00
8.00
NSC-VIII
9.50
9.00
8.16
Post office time deposit*
9.00
8.50
7.50
Senior Citizens Savings Scheme^
—
—
9.00
NSC: National Savings Certificate;* Five-year deposits
^Senior Citizens Savings Scheme was introduced from July 2004
Once announced, the latest review would be the third attempt to restructure the small savings rate regime. In 2001, the government had set up a committee headed by the then RBI Deputy Governor Y V Reddy. The committee had recommended that administered interest rates continue only over the short term and would have to be benchmarked against market-determined rates on government securities.
The recommendations were not acted on because of a general view that the government securities’ market was not as mature as it is now in terms of evolving a reference interest rate structure.
In 2004, an RBI panel on small savings schemes headed by former Deputy Governor Rakesh Mohan had suggested a reduction in interest rates. The panel was also of the view that all small savings schemes should be made taxable to avoid interest rate anomalies arising out of the tax-free status of certain schemes.
I request you that befor consider any matter in this regard please think rural persons like agriculturist,pensioners,senior citizen and those who are workig in small savings fully dependent of postal schemes.
In this regard my suggestion to the Govt. of India/RBI is when decision for decrease in Interest Rates on PO Schemes is taken, a condition may also be put that all retired/retrenched workers of private sector, who are dependent only on such investments, are prohibited to invest their savings/money in such schemes so that they may not have any genuine source of their income and may also be compelled to park all their money in banks only at lowest rate, because lending rate may be at such lower rate that every person desirous of loan may take loan easily and repay or not repay the same depending on his desire. It is priority for the Govt. to increase the prosperity of the prosperous and snatch the living right of the such persons, who are unable to earn their living only due to corrupt system.
Posted by: Bhupesh
June 15 , 2009, 20:33 IST
Before taking any decision about reduction in interest rate under small saving schem, Government should have to seriously think over about the widows and senior citizens who are dependent only on the income earned through interest against secured investment. For this purpose the Government may enhance the investment period e.g. at present MIS is meant for 06 years this may be enhanced by increasing suitable number of years such as 07/08 years without reducing the interest rate presently applicable. This will be helpful im maintaing the leaving standard of widows/senior citizen
Posted by: S.B
June 15 , 2009, 20:29 IST
Jaswant Sinha and Jaswant Singh were the two architects of reducing the
interest rates during BGP rule. Congress fine tuned further and reduced
the rates in Post Offices but as banks were giving slightly better
interests people did not bother. Pranab Mukherjee is a dishonest politician
like other politicians. You read his statements before election,midway
during election process and after the results are out. Inflation is a tax on savings and in the last five years there is a 50 % inflation that means that your savings lost 50 % of its value. This is due to indiscriminate
printing of paper money. I salute the shoe throwers.
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