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.
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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 %) | ||
Jan ‘01
Mar ‘02
Mar ‘03
^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.