Interest on savings schemes cut

By Our Special Correspondent

NEW DELHI, JAN. 14. The Government today announced an across-the- board one per cent cut in the deposit rates on all small savings schemes like Public Provident Fund (PPF), National Savings Certificates, Kisan Vikas Patras, Post Office fixed deposit and Post Office recurring deposit schemes.

Effective tomorrow, the interest on PPF will be 11 per cent per annum against 12 per cent at present. However, the interest will continue to be totally exempt from income tax. The Post Office fixed deposit scheme for one, two, three and five years will now fetch eight, nine, 10 and 10.5 per cent interest annually while the interest on Post Office recurring deposits will be 10.5 per cent.

The interest on Post Office monthly income account will now be 11 per cent but the 10 per cent bonus on maturity in this scheme will continue as also the five per cent discount in case of premature withdrawal before three years. The Kisan Vikas Patras will now double in six and a half years instead of six years and premature encashment values in case of such Patras have also been revised correspondingly. The National Savings Certificate-VIII issue will now offer an interest of 11 per cent while the interest on National Savings Scheme 1992 will be 10.5 per cent.

Earlier in the day, the Post Offices and public sector banks had been instructed not to accept any deposits under these small savings schemes in order to facilitate a reduction in the interest rates. Consequently, deposits under all these schemes will not be accepted from tomorrow. Acceptance would resume as early as possible in different parts of the country, but in any case not later than February 1 this year.

Officially, the reasons given for the reduction in the interest rates is that a committee of experts had recommended last year to link the payout under the small savings schemes to rates of similar savings instruments in banks and financial institutions. The committee had also recommended that the exercise be undertaken annually and the interest rates had been reduced last year as well on January 1, 1999.

For the states, the Finance Ministry has decided to reduce the rate of interest that they pay on borrowings from the collections made under the small savings schemes. Consequently, the rate of interest on special securities of the States and union territories issued against small savings collection would come down from 13.5 per cent to 12.5 per cent. Besides, it has also been decided that the share of the states and union territories against their net collections under small savings schemes be increased from 75 per cent to 80 per cent. The last revision in this share was done in 1987.

A reduction in deposit and lending rates forms part of the Vajpayee Government's agenda for the first 100 days. This agenda was drawn up by the Planning Commission in early October, soon after the return to office of the National Democratic Alliance (NDA) Government and reportedly contains issues like reduction in food and fertilizer subsidy, accelerated disinvestment of public sector equity (for which a separate department has now been set up) and reduction in the deposit and lending rates.

Sources in the Government indicate that the cut in the deposit rates was discussed at the level of the Prime Minister, Mr. Atal Behari Vajpayee, the Deputy Chairman of the Planning Commission, Mr. K. C. Pant, and the Finance Minister, Mr. Yashwant Sinha. The Governor of the Reserve Bank of India, Dr. Bimal Jalan, has also been consulted, which indicates that a possible reduction in bank deposit and lending rates could also be on the anvil.

The reason for the lowering of the deposit rates is said to be the urgent need to reduce the cost of borrowing by the Central and the State Governments. Also, industry has been repeatedly pressing the Government to announce a reduction in lending rates in order to facilitate investments. It had also been decided that in case there was any fall in small savings deposits due to the reduction in deposit rates, the affected states could be compensated by providing them a higher share of borrowings from the collection made under these schemes.

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