Small Savings Schemes interest rates slashed

Rates to be re-calibrated every quarter; government has also linked the returns to the market rate prevailing on government securities.

February 17, 2016 10:51 am | Updated September 06, 2016 02:02 pm IST - New Delhi

To push lower interest rates and make a switch to market-linked rates for small savings schemes, the government has slashed returns on schemes like Kisan Vikas Patras and recurring deposits by 0.25 per cent. It has also linked the returns of all small savings schemes to the market rate prevailing on government securities, to be re-calibrated every quarter, effective from April 1, 2016.

What does this mean?

Post office savings of 1, 2 and 3 year term deposits and 5-year recurring deposits currently fetch 8.4 per cent interest per annum. The Kisan Vikas Patras (KVPs) currently have an effective interest rate of 8.7 per cent per annum.

Following the government’s decision, they will fetch around 8.15 per cent and 8.45 per cent, respectively. However, the rates, to be decided in March for the April-June quarter, will be based on the prevailing market rate at that point.

Why is this important?

“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 finance ministry said in a release about the decision on Tuesday.

“This is important in several ways. If you want to keep all interest in the system at market rates, you can’t keep some regulated. The banks have been saying that some schemes such as the small savings schemes have higher rates, and so that makes it difficult for them to transmit the RBI’s interest rate cuts. This market-linking should at least remove that difficulty,” DK Joshi, Chief Economist at Crisil, told  The Hindu .

Every quarter

Currently, the interest rates of all small saving schemes are reviewed every few years. However, from April 1, 2016, the rate of return on all small savings schemes including the PPF would be recalibrated every quarter. The returns on Sukanya Samriddhi Yojana, the Senior Citizen Savings Scheme and the Monthly Income Scheme will continue to enjoy a higher return than government securities but would also face a quarterly reset.

However, the market-linking of the returns of these schemes could mean that their rates of return fall significantly below their current levels.

“The small savings interest rates are perceived to limit the banking sector’s ability to lower deposit rates in response to the monetary policy of the Reserve Bank of India.  In the context of easing the transmission of the lower interest rates in the economy, the Government also has to take a comprehensive view on the social goals of certain National Small Savings Schemes,” the government release said.

“The other point is that the small savings rate should also reflect the general interest rates in the economy. This was coming, as even the government had said it was working towards this,” Mr Joshi added.

“The 25 basis point spread that 1 year, 2 year and 3 year term deposits, Kisan Vikas Patra (KVP) and 5 year recurring deposits have over comparable tenure government securities, shall stand removed with effect from April 1, 2016 to make them closer in interest rates to the similar instruments of the banking sector,” the release said. 

The compounding of interest, which is currently done bi-annually for 10-year National Saving Certificates, 5-year National Saving Certificates and KVPs, will be done on an annual basis from April 1 onward, an effective reduction of the interest rate of these instruments.

The rates of interest applicable on the various small savings schemes for the April-June quarter will be notified in March, and the same will be reviewed in June, September and December every year. The ministry said making National Saving Schemes market-oriented is in the interest of overall economic growth of the country, even while protecting their social objectives and promoting long term savings.

Encouraging long term deposits

In a move that is expected to encourage long-term savings, the spread of 25 basis points that long term instruments such as the 5-year term deposits, 5-year National Saving Certificates and Public Provident Fund (PPF) currently enjoy over government securities of comparable maturity have been left untouched “as these schemes are particularly relevant to the self-employed professional and salaried classes”.

“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 notification added.

The government has also said that it would allow the premature closure of PPF accounts in genuine cases, such as cases of serious ailment, higher education of children, etc. However, such a closure will be permitted with a penalty of a 1 per cent reduction in the interest payable on the whole deposit and will be applicable only for accounts having completed five years from the date of opening.

Top News Today

Sign in to unlock member-only benefits!
  • Access 10 free stories every month
  • Save stories to read later
  • Access to comment on every story
  • Sign-up/manage your newsletter subscriptions with a single click
  • Get notified by email for early access to discounts & offers on our products
Sign in

Comments

Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.

We have migrated to a new commenting platform. If you are already a registered user of The Hindu and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.