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Small savings face interest cuts

The interest earned on a range of state-run saving schemes including the public provident fund will be linked to market rates that will be revised every quarter, the finance ministry said on Thursday.

business Updated: Feb 12, 2016 18:25 IST
HT Correspondent
While the Reserve Bank of India has cut policy rates by 1.25 percentage point in the past year, banks have passed on the benefit to borrowers by lowering lending rates by just 0.70 percentage point.
While the Reserve Bank of India has cut policy rates by 1.25 percentage point in the past year, banks have passed on the benefit to borrowers by lowering lending rates by just 0.70 percentage point.(PTI)

The interest earned on a range of state-run saving schemes including the public provident fund will be linked to market rates that will be revised every quarter, the finance ministry said on Thursday.

The new system, effective from April 1, could result in lower interest rates earned on these schemes given that market rates move in tandem with government bond rates that are currently on a downward trend.

Dedicated schemes for the elderly and girl children — the senior citizens saving scheme (SCSS) and the recently launched Sukyana Samriddhi Yojana (SSY) — will, however, be governed by the existing system of interest rates fixed yearly.

HT first reported on January 21 that these two schemes will be exempted from market-linked interest rates.

“The decisions have been taken and executive order and notification would be issued in a day or two… broadly the underlying philosophy of small savings rate changes is to make the rate more frequently market-aligned, make it as closely market-aligned as possible,” economic affairs secretary Shaktikanta Das told reporters.

The government currently offers interest rates ranging from 4% to 9.3% on a raft of popular schemes such as the post office savings account, the public provident fund, the national savings certificate and the Kisan Vikas Patra besides the SCSS and the SSY.

While middle-class Indians rely on small investment options offered at post offices for social security and parking surplus money, the government depends on this pool of money, also called the National Small Savings Fund, to finance part of its budget.

The SCSS will continue to fetch 9.3% per annum as the government is of the view that a cut will upset the financial plans of millions of pensioners and retired individuals.

Likewise, the SSY will continue to fetch a return of 9.2%. The scheme was launched last year to encourage parents to set aside money for girl children to fund their education and future needs.

The other schemes, including the popular post-office savings scheme and the public provident fund, could see a cut in interest rates.

The total outstanding deposits in such schemes stand at Rs 9 lakh crore. Indians have been parking more than Rs 50,000 crore annually as additional savings in these instruments over the last three years.

The move is expected to allow banks to pass on policy rate cuts by the central bank through lower lending rates. Banks say they are forced to offer high interest rates to depositors to make it more attractive for people to park extra funds with them ahead of post-office and other state-run saving schemes.

This, in turn, prohibits them from significantly passing on policy rate cuts to borrowers.

While the Reserve Bank of India has cut policy rates by 1.25 percentage point in the past year, banks have passed on the benefit to borrowers by lowering lending rates by just 0.70 percentage point.