Finance minister Pranab Mukherjee on Friday approved major changes in the National Small Savings Fund (NSSF) and post office savings schemes to make these more attractive to investors and bring their rates almost at par with bank fixed deposits.
In an overhaul of the terms of these savings schemes, the minister allowed a higher ceiling for deposits in public provident fund (PPF), linked return on small savings to market rates, discontinued the Kisan Vikas Patra and allowed premature withdrawals from post office term deposits. Besides, the interest rate for post office savings accounts has been raised from 3.5% to 4%.
Post office term deposits can now be withdrawn before maturity with a penalty of 1%, a measure intended to improve liquidity.
The government last July set up a committee headed by the Reserve Bank of India?s then deputy governor Shyamala Gopinath to review the structure of NSSF, including deregulation of interest rates on such savings. The committee submitted its report in June this year. The government has now accepted most of the committee’s recommendations.
These changes will come into effect after the necessary notifications are issued, according to a finance ministry statement. The ministry has also reduced the maturity period of the monthly income scheme and National Saving Certificates (NSC) from six years to five.
A new 10-year NSC will replace the Kisan Vikas Patra, meeting the need for a long-term investment instrument.
For the first time, interest rates on small savings schemes other than post office schemes are being benchmarked to rates of government securities of similar maturity with a positive spread of 25 basis points.
The finance ministry has streamlined the structure of small savings schemes to stem the massive withdrawals from the NSSF noticed in the recent months. Investors withdrew funds from NSSF as banks offered higher deposit rates and better liquidity.
The government also raised the ceiling on annual subscriptions in PPF from the current R70,000 to R1 lakh. The interest rate on PPF deposits is being raised to 8.6% from 8%. The government, however, doubled the interest rate to 2% on advances against PPF deposits.
In order to cut down states’ dependence on the NSSF and encourage them to borrow more from the market, the government reduced the mandatory component of investment of net small savings collections in state government securities to 50% from 80%.
The balance amount could either be invested in central government securities or lent to other states. It could also be invested in securities issued by infrastructure companies/agencies wholly owned by the central government.
The interest rate on NSSF loans has been kept at 9.5%. The government will also introduce half-yearly payment of interest by the Centre and states. The Centre and states’ annual repayment of NSSF loans will be reinvested in central and state government securities in the ratio of 50:50.
The government further decided to discontinue the commission on PPF schemes (1%) and senior citizens savings scheme (0.5%).
Interest rate on existing investments from NSSF in central government securities till 2006-07 will be reset at 9% and on those from 2007-08 till 2010-11 will be reset at 9.5%.
A monitoring group will be set up to resolve various operational issues like reducing the time lag between collection and investment. The group will comprise of officials from the finance ministry, RBI, department of posts, State Bank of India, other select banks and state governments.