Savers in post office schemes will soon be able to enjoy higher returns as the finance ministry has decided to fast-track reform of the National Small Savings Fund (NSSF).
The ministry has decided to expeditiously implement recommendations made by a high-level expert panel that suggested market-linked interest rates for postal savings accounts, a reduction in the maturity period of National Saving Certificate and a higher ceiling for annual subscriptions to Public Provident Fund.
The ministry is of the view that a more friendly NSSF will win back investors who have been flocking to banks lured by higher interest rates they offer on term deposits. This has resulted in a steep fall in deposits under the NSSF, forcing the government to borrow Rs 52,800 crore over its budget target from the market this fiscal.
"It has been decided to expeditiously implement it (the report on NSSF reform)," a senior finance ministry official told ET. Most banks are offering 9.25% return on fixed deposits of one year, while the highest return on a oneyear time deposit at a post office is 6.25%. Money kept in a bank savings account attracts 4% rate of return while a postal savings account offers 3.5% rate of interest.
The committee on NSSF, chaired by Reserve Bank Deputy Governor Shyamala Gopinath, had in June this year proposed to raise the interest rates on schemes offered by post offices by 0.5% to 1%.
The panel had proposed to raise the interest rate on post office savings accounts by 0.5% to 4%, reduction in the maturity period of National Savings Certificates by one year to five years, and an increase in the annual contribution limit in Public Provident Fund to Rs 1 lakh from Rs 70,000.
While recommending discontinuation of the popular Kisan Vikas Patra, the panel had proposed that the mandatory component of investment of net small savings collections in state government securities be reduced to 50%.
States can access up to 80% of NSSF for financing their annual expenditure. Funds are offered as 25-year loans carrying 9.5% interest. This is higher than the rates at which states can borrow from the market.
The finance ministry had initiated discussions with state governments on the panel's recommendations as they have implications on their borrowings. These discussions have concluded and the ministry is now looking to implement the committee's suggestions within 60 days.
"Most states are very positive about the NSSF reform," said the official quoted earlier. Experts say the move will once again draw investors to small savings.
"It is a good and logical move," said Dhirendra Kumar, CEO at Value Research, a mutual fund research company. "In the current environment, investors will react positively and turn back to small savings as they are the safest and the most widely available." Small savings saw a net outflow of Rs 26,000 crore in the first three months of the current fiscal. The government had to switch debt of about Rs 24,000 crore it had estimated to raise from NSSF in the budget with market borrowings, leading to hardening of bond yields.
The government will have to support NSSF if the outflows continue to be high and balance in the fund remains negative. According to some experts, reform of NSSF will benefit both the Centre and the states.
"In terms of borrowings, it will be beneficial for both Centre and states," said D K Srivastava, director of Madras School of Economics. "They will have access to small savings as an additional window, which has been drying up of late, though it may not make much difference in terms of costs."
Source: Economic Times
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October 10, 2011