Govt to cut returns on small savings schemes by 25 bps

The government on Tuesday said that the interest rates of small saving schemes would be recalibrated on a quarterly basis instead of annual basis from April 1, 2016, to align them with the market rates of the related government securities (G-secs).

In essence, the finance ministry announced that it would cut by 25 basis points (bps) the interest rates on 1-year, 2-year and 3-year term deposits, Kisan Vikas Patra and 5-year Recurring Deposits from April 1 to make them closer in interest rates to the similar instruments of the banking sector.

Post office savings of 1-, 2- and 3-year term deposits, Kisan Vikas Patra (KVP) as well as 5-year Recurring Deposits till now earned 0.25 per cent higher interest than the G-secs of similar tenures. That will be removed.

"This is expected to help the economy move to a lower overall interest rate regime eventually and thereby help all, particularly low-income and salaried classes," the ministry said in a statement.

The final interest rates for the April-June quarter will be notified on March 15.

However, at least six of these schemes will remain unaffected by the revisions as Centre has described them as schemes based on "laudable social development or social security goals." Centre also said that premature closure of Public Provident Fund (PPF) accounts shall be permitted in genuine cases, such as cases of serious ailment, higher education of children etc.

"The Sukanya Samriddhi Yojana, the Senior Citizen Savings Scheme and the Monthly Income Scheme are savings schemes based on laudable social development or social security goals. Hence, the interest rate and spread that these schemes enjoy over the G-sec rate of comparable maturity viz., of 75 bps, 100 bps and 25 bps, respectively, have been left untouched by the government," the finance ministry said in a press release.

It also added long-term instruments, such as the 5-year Term Deposit, 5-year National Savings Certificates (NSCs) and the PPF had been left untouched as these schemes were relevant to the self-employed professional and salaried classes. The statement also said that the biannual compounding of interest allowed for 10-year NSC, 5-year NSC and Kisan Vikas Patra shall be done on an annual basis from April 1.

"Premature closure of PPF accounts shall be permitted in genuine cases... This shall be permitted with a penalty of one per cent reduction in interest payable on the whole deposit and only for the accounts having completed five years from the date of opening," it said.

Finance Minister Arun Jaitley had announced on September 29 that Centre would review small savings schemes to enable transmission of the central bank's rate cut by banks. This was the same day when Reserve Bank of India Governor Raghuram Rajan had cut interest rate by 50 bps from 7.25 per cent to 6.75 per cent, bringing it to a total cut of 125 bps for the calendar year 2015.

The finance ministry has finalised suggestions that were made by various stakeholders, including banks and other ministries and brought up during the pre-Budget meetings with country's top banks and leading economists, suggesting changes in the small savings rate.

The interest rates for these schemes range from 8.4 per cent for a one-year deposit to 9.3 per cent for the five-year Senior Citizen Savings Scheme. Banks have been reluctant to transmit the entire policy rate cut to borrowers as they want to keep their deposit rates attractive to match with those in small saving schemes, popular among masses.