Small savings rates may be linked to mkt

14-Jul-2010

Finmin Sets Up Panel To Review Structure Of National Small Savings Fund The government has kicked off a review of the small savings schemes, which could lead to deregulation of interest rates or benchmarking of returns on them to market rates. The finance ministry has set up a committee to review the structure of the National Small Savings Fund (NSSF) and give recommendations on making the schemes more flexible and market-linked. The committee will be headed by Reserve Bank of India deputy governor Shyamla Gopinath. Other members of the committee include Icrier director and CEO Rajiv Kumar and Corporation Bank CMD JM Garg.

"While making its recommendations, the committee is expected to consider the importance of small savings within the overall savings in the economy, especially its contribution in promoting savings amongst small investors, and need of NSSF to be a viable fund," a finance ministry release said on Tuesday. The restructuring of the NSSF was one of the key suggestions of the 13th Finance Commission, as it would help cut down states' dependence on the fund and make them rely more on market borrowings. Public Provident Fund, National Savings Certificate and Kisan Vikas Patra along with post office savings schemes form the core of the government's small savings schemes. Deposits into these schemes go to the NSSF. The rate of return on these schemes is about 8%.

States can access up to 80% of NSSF for financing their annual expenditure. The funds are given as a 25-year loan carrying 9.5% interest, higher than rates at which states can borrow from the market. The commission had also recommended that the interest rate on loans contracted by the states till 2006-07 and outstanding at the end of 2009-10 be reset at a common interest rate of 9% in place of the existing rates of 10.5% or 9.5%. Experts have also argued that administered rates offered by these schemes interfere with the interest rate structure in the economy, and have suggested returns on these be benchmarked to yields on government securities or inflation. In a declining interest rate regime, the high returns offered on them sets a floor as funds move away from banks to these scheme, preventing banks from lowering rates much below that offered on these schemes.

Source : www.insuremagic.com