The Union Ministry of Finance on 16 February 2016 announced changes to regulations that govern interest rates on various National Saving Schemes (NSSs).
The changes primarily focused on aligning interest rates on NSSs with other comparable saving instruments so that the operation of NSSs will become market oriented.
The changes, which will come into effect from 1 April 2016, were announced in the interest of overall economic growth of the country, even while protecting their social objectives and promoting long term savings.
At present, Sukanya Samriddhi Yojana, Senior Citizen Savings Scheme and Monthly Income Scheme, National Saving Certificates, Public Provident Fund and Kisan Vikas Patra (KVP) are considered as part of NSSs.
Key changes to National Saving Schemes
• The present interest rate spread enjoyed by the Sukanya Samriddhi Yojana, the Senior Citizen Savings Scheme and the Monthly Income Scheme over the G-sec rate of comparable maturity viz., of 75 basis points (bps), 100 bps and 25 bps respectively were left untouched.
• The spread of 25 bps that long term instruments, such as the 5 yr Term Deposit, 5 year National Saving Certificates and Public Provident Fund (PPF) currently enjoy over G-Sec of comparable maturity were left untouched. This will help the self-employed professional and salaried classes and encourage long term savings.
• The 25 bps spread that 1 yr., 2yr. and 3 yr. term deposits, KVPs and 5 yr Recurring Deposits have over comparable tenure Government securities, shall stand removed. This will make them closer in interest rates to the similar instruments of the banking sector.
• The interest rates of all NSSs would be recalibrated on a quarterly basis to align the small saving interest rates with the market rates of the relevant government securities.
• The compounding of interest which is biannual in the case of 10 yr National Saving Certificate, 5 yr National Saving Certificate and Kisan Vikas Patra shall be done on an annual basis.
• Premature closure of PPF accounts shall be permitted in genuine cases, such as cases of serious ailment, higher education of children, etc. This shall be permitted with a penalty of 1% reduction in interest payable on the whole deposit and only for the accounts having completed five years from the date of opening.
Why these changes were announced?
At present, small saving schemes offer higher interest rates when compared to that of other comparable public and private saving instruments in the market.
This interest rate disparity is perceived to limit the banking sector’s ability to lower deposit rates in response to the monetary policy of the Reserve Bank of India (RBI).
In effect, there is insufficient monetary transmission leading to higher interest rate regime in the financial market, which in turn is leading to less investment and ultimately resulting in lower economic growth.
Hence, in the context of easing the transmission of the lower interest rates in the economy, the government took a comprehensive view on the social goals of National Small Savings Schemes and revised them accordingly.
These new regulations are expected to help the economy move to a lower overall interest rate regime eventually and thereby help all, particularly low-income and salaried classes.
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When: 16 February 2016