PPF, NSC likely to fetch you less

The government is expected to cut the 8% administered interest rate on its small savings schemes by 50-75 basis points in Budget 2009, two officials in the finance ministry told ET. The move will allow banks room to pare lending rates as they will be able to clip term deposit rates without losing small investors to these savings schemes.

“While meeting the central bank governor on Friday, the finance minister is learnt to have discussed the quantum of cut in administered small savings schemes,” said a senior RBI official who confirmed that there will be a cut in administered rates. This was Pranab Mukherjee’s second meeting with RBI governor D Subbarao after taking charge as finance minister towards May end.

The interest rate on small savings was 12% a decade ago, and was last slashed by the NDA government from 9% by 100 basis points in Budget 2003. One basis point is one-hundredth of a percentage point.

“The move to cut interest rate on small savings is a significant step. Small savings schemes keep the average cost of deposits higher than it should be. With this important measure, deeper cuts in lending rates can be expected.

The stickiness at the lower end of the interest rate structure will be reduced substantially,” one of the finance ministry officials said on condition of anonymity.

Millions of risk-averse Indians, a huge percentage of whom are senior citizens, invest in these savings plans that offer guaranteed returns and tax benefits, along with the government assurance of safety. The investment into these savings plans increased to Rs 143,668 crore in 2008-09 from Rs 123,652 crore in 2007-08.

Chiefs of public sector banks have informed the finance minister that since the government-run small savings schemes such as Public Provident Fund and national savings scheme offer higher interest rates than bank term deposits, they will lose investors to these schemes if they cut deposit rates further.

Bank term deposits that mature after a year offer 6.5-8% interest rate compared with 8% per annum returns on post-office savings bank deposits, post-office recurring deposit, monthly income scheme and Kisan Vikas Patra.

“Close to 55% of savings by Indians are in bank deposits, and a shift of 15-20% of these deposits to small savings schemes can be expected if the term deposit rates are cut further. However, if we don’t bring down the deposit rates, cuts in lending rates will remain limited,” head of a large public sector bank told ET on condition of anonymity.