Government may cut interest on non-bank savings schemes

The government may cut interest rates on small savings schemes such as postal schemes by 50-75 basis points as it begins a review of the administered interest rate structure for small savings schemes, according to various reports. It also plans to set up a committee headed by a former Reserve Bank of India (RBI) governor to suggest a roadmap for possible decontrol.

The interest rate on small savings schemes is currently 8 per cent, but this may go down by 0.5-0.75 per cent. "With this important measure, deeper cuts in lending rates can be expected," The Economic Times quoted an unnamed Reserve Bank of India official as saying. However, there was no official confirmation.

Interest paid on schemes under post office savings plans are tax free, and compete with banks in deposits mobilisation. Analysts cite it as a key hurdle for banks to cut their deposit rates sharply. The interest rate on this scheme was last cut by 100 basis points to 8 per cent in 2003.

''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,'' the RBI official said. This was Pranab Mukherjee's second meeting with RBI governor D Subbarao after taking charge as finance minister.

''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 was quoted as saying.

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 per cent interest rate compared with 8 per cent per annum returns on post-office savings bank deposits, post-office recurring deposit, monthly income scheme and Kisan Vikas Patra.

Business Standard reports that the terms of reference for the review are yet to be finalised, but it will broadly work out an interest rate structure that helps economic growth.

While de-regulating, the rates on small savings' interest rates could either be cut 25 to 50 basis points or linked to the sovereign rate, which is the interest rate on government securities for a specific maturity.