Interest Rates for Small Savings Schemes, may be reduced by the Government

Interest Rates for Small Savings Schemes, may be reduced by the Government

Interest rates on small savings schemes, except the ones for the girl child and senior citizens, could be reduced by 25 to 50 basis points (bps) with effect from April 1.

Interest rates on small savings schemes, except the ones for the girl child and senior citizens, could be reduced by 25 to 50 basis points (bps) with effect from April 1. Henceforth, the interest rate would also be reset on a quarterly basis instead of annual basis. An official announcement in this regard is expected in a day or two.

Without mentioning how much the reduction would be in the interest rates, economic affairs secretary Shaktikanta Das on Thursday said the spread of 25 bps (above the average yield from government securities with similar maturity) available now for the small saving schemes below five years, would be reduced. “But for long term saving schemes of above five years, the spread will be protected because the government has taken into consideration the interest of the small savers and the need to encourage long term savings,” Das said. Even if the spread is maintained for long-term savings, the actual interest rate on these could come down a bit as yields on government securities have declined over the past year, analysts say.

Though small savings rate are usually determined to be 25 basis points above the average yield from government securities with similar maturity in the previous year, there have been three instruments that carry even higher rates: Sukanya Samriddhi Account, the Senior Citizens Savings Scheme and the National Small Saving Certificates (NSC). While the proposed changes won’t impact the high interest bearing schemes for the girl child and senior citizens, there could be some reduction in the NSC rates also.

Once these rates are announced, it is expected that bank deposit and lending rates to also fall. While the Reserve Bank of India has been cutting rates, banks have passed on less than half of the cuts on account of high rates on small savings schemes. Bankers say if they cut rates, much of their deposits would flow into small savings schemes.

For example, one-year postal deposit offers 8.4% where as State Bank of India offers 7.25% for deposits of the same tenure (7.5% for senior citizens). For the girl child’s welfare, the Sukanya Samriddhi Account Scheme offers 9.2% interest for a period up to 10 years while SBI offers only 7% on term deposits of 5-10 years (7.25% for senior citizens).

The cumulative corpus of National Small Savings Fund is projected to rise to Rs 9.59 lakh cr after accretion of Rs 52,000 cr in 2015-16.

Source:Sapost