The government has set up a committee, headed by Reserve Bank of India deputy governor Shyamala Gopinath, to review the structure of the National Small Savings Fund (NSSF), including deregulation of interest rates on such savings.
Interest on small savings schemes, such as public provident fund (PPF) and post office monthly income scheme, is currently administered by the Centre.
The committee will recommend ways to make small savings plans more market-linked and other investment opportunities for the fund collections, the finance ministry said in a statement on Tuesday.
It will also review the existing terms of loans extended from the NSSF to the Centre and the states and recommend the changes required in the arrangement of lending the net collection of small savings to the Centre and the states.
The panel has been set up following the recommendation of the 13th Finance Commission (TFC), which suggested debt relief to states by re-setting loans at a uniform interest rate of 9% in place of the current 10.5% and 9.5%.
NSSF collections stood at Rs 2,200 crore in the first two months of FY11, as compared with Rs 719 crore a year ago, according to latest data available with the Controller General of Accounts.
While making its recommendations, the committee is expected to consider the importance of small savings within the overall savings in the economy, especially its contribution in promoting savings amongst small investors and need of NSSF to be a viable fund,? the ministry said.
Other investment opportunities for the collections, from small savings and repayment proceeds of NSSF loans extended to states and the Centre, will also be monitored.
Interest on various small savings schemes is administered by the Centre, and currently stands at 8% on five to seven years? maturity, slightly higher than fixed term deposits of banks of comparable tenure.
The Centre gives each state a part of the amount raised through small savings as a 25-year loan carrying 9.5% interest. However, there is a moratorium of five years on the principal amount.
The TFC, headed by former finance secretary Vijay Kelkar, said that when interest rates on loans from these schemes are higher than market rates, it causes an increase in subscription to these instruments, thereby increasing the flow of loans to states.
With overall borrowings capped by the Fiscal Responsibility and Budget Management (FRBM) targets, the states cannot take recourse to open market borrowings. Thus, states may not be able to benefit from lower interest rates even if market rates go down as they are saddled with high inflows from high-cost loans derived from small savings.
States are allowed to go for market borrowings only till the fiscal deficit widens to 4% of the GDP. States have also raised concerns on the tenure of the loan. There is significant mismatch between the maturity period of five to seven years for most small savings instruments and the 25-year tenure of loans extended through these schemes.
Other members of the committee include finance ministry officials, principal secretaries (finance) of Maharashtra and West Bengal, Corporation Bank and CMD JM Garg.