Despite some criticism and misgivings in certain quarters, the government has decided to re-introduce the Kisan Vikas Patra (KVP), a savings instrument that was discontinued three years ago. Positioned as a savings instrument in line with other continuing ‘small savings schemes’ such as the Public Provident Fund (PPF) and the National Savings Certificates (NSCs), the new KVP, like its predecessor, has certain advantages as well as disadvantages over these. Most ordinary investors will compare the new KVP with bank deposits and other debt instruments.Broad features of the new KVP
* Interest: 8.7 per cent.
* Tenure: eight years and four months (100 months).
* Investment doubles in 100 months.
* Minimum lock-in period two years and six months.Liquidity
* Can be encashed in eight equal monthly instalments after the lock-in period
* Can be transferred to another person by endorsement and delivery
* Can also be given as collateral for loans by banks
* Minimum investment Rs.1,000. Thereafter, in denominations of Rs.5,000, Rs.10,000 and Rs.50,000. There is no maximum limit.
* Taxability: fully taxable
* Mode of investment: cash or cheque
* Know your customer (KYC) norms: PAN not required but identity/address proof required
* Will be sold initially through post offices across the country, but later through some government-owned banks alsoHow does the new KVP fare?
Any investment proposition needs to be evaluated in terms of certain well-defined parameters. These include safety, security, yield or return, liquidity, accessibility, convenience and tax advantage. These parameters are relevant for any investment proposition whether debt or equity.
For the convenience sake, the re-launched KVP can be compared on the one hand with the existing savings instruments, and with bank deposits on the other. In comparison to its previous version, the new KVP offers a 0.5 percentage point higher yield (8.7 versus 8.2). Investment under the old KVP doubled in eight years and seven months. In the new KVP, the doubling takes place in eight years and four months.
A comparison with a discontinued scheme is not particularly useful. In relation to the existing savings schemes, the yield on the new KVP is on a par with the PPF and the NSCs. It is equally safe. The government would make it more easily available and also educate customers. Accessibility to the KVP should not be a problem.Comparing with bank deposits
Taking three other relevant traits — liquidity, convenience and tax advantage — the new KVP is reasonably liquid. Investors can come out after the minimum lock-in period in eight equal instalments. The KVP can also be given as collateral. Unlike PPF and NSCs, the KVP does not have a tax advantage. Interest on it is fully taxable.
Bank deposits are superior to KVP in terms of returns — three year fixed deposits offer 9 per cent and some banks even more. The argument that deposit rates are set to fall over the medium-term is no doubt valid, but one expects the banks to safeguard their depositors’ concerns by floating innovative schemes. It is also certain that the corporate bond market will revive and be a conduit for infrastructure finance. This will matter to senior citizens and others who want a fixed, steady return in the form of investment in infrastructure bonds. Bank deposits are liquid, absolutely secure and highly accessible to most middle-class investors. They have a minimum tax advantage — practically restricted to interest on savings accounts.
For those who have no access to banks, investment in KVP may be a worthwhile proposition. Having no tax concessions, the KVP as in investment is for those who do not pay taxes at all or are in the lower tax bracket.
The biggest advantage claimed for the KVP — indeed its USP — is that it is a bearer bond, transferable by endorsement and delivery. This confers unmatched anonymity to the holder of the instrument.Policy perspective
But that precisely is its main drawback from a policy perspective. The earlier version was discontinued because it was suspected of being a conduit for laundering black money.
In the new KVP too, there is very little compliance of KYC norms that are routinely applied by banks, mutual funds and the like. In fact, it is the conviction that the onerous KYC norms are driving away bank customers at a time when household financial savings have dipped seriously, that seems to have prompted the government to re-launch a new instrument with very few entry barriers, The Finance Minister has clarified that certain precautions will be taken for large investments in KVPs.
How that reflects on the new KVP’s success in terms of collections remains to be seen. Whatever way one looks the KVP has very few justifications beyond the obvious — mobilising funds by the government at all costs.