SMALL SAVINGS SCHEMES - ACHCHE DIN GAYE

By Ruma Dubey

The price of vegetables remains stable.

Tur dal price hovers over Rs.150/kg.

Apple costs over Rs.100/kg.

Petrol is a bit cheaper but no one is passing on this advantage to the people.

There is major water cut across Maharashtra and with summer round the corner, things could only get worse. The Union Budget is round the corner and everyone is already talking about costs going up as most expect indirect tax rates to increase. Obviously any burden on the manufacturer, it will be passed on to us. Thus as we move towards summer, costs and living, both will only get hot and humid.

In the midst of all this, we now hear that interest rate on small saving schemes have been reduced. Though only on short tenure ones and that too by an 0.25%, this news will not go down too well with senior citizens, widows and others who depend solely on these saving schemes to get by in life. It has also linked the returns of all small savings schemes to the market rate prevailing on government securities, to be re-calibrated every quarter. The rates of interest applicable on the various small savings schemes for the April-June quarter will be notified in March, and the same will be reviewed in June, September and December every year. This means, rates could go down further as enter the south-bound interest rate cycle.

Effective 1st April 2016, in terms of saving deposits, for1,2 and 3 years deposits, the rate has been slashed by 25 bps to 8.15% each. That in five-year savings remains unchanged at 8.5%. On the other hand, rate on 5-year recurring deposit has been reduced by 25 bps to 8.15%. No changes in 5 year Senior Citizen Savings Scheme, Monthly Income Scheme and 5 and 10 year National Savings Certificate. PPF interest rate remains unchanged at 8.7% while Kisan Vikas Patra comes down from 8.7% to 8.45%.

The compounding of interest, which is currently done bi-annually for 10-year National Saving Certificates, 5-year National Saving Certificates and KVPs, will be done on an annual basis from April 1 onwards.

PPF interest rates will also be market-linked and this is sure to hurt the small salaried and self-employed. The Govt though will allow the premature closure of PPF accounts in as cases of serious ailment, higher education of children, etc. This premature closure will attract a penalty – 1% will be reduced in the interest payable on the whole deposit and will be applicable only for accounts having completed five years from the date of opening.

Agreed that the Govt has been very fair and spared the senior citizens from this token rate cut. And this was long overdue. Banks, despite a 125 bps rate cut announced by RBI have passed on just a 60 bps rate cut. They argued rightly too that they could not afford to reduce deposit rates any more when Govt’s schemes offered much higher rates – this would have meant that people would have flocked from banks to these Govt schemes. At the same time, because the banks were not bringing down deposit costs, they could not reduce lending costs thus keeping the costs higher for borrowers despite RBI reducing rates. Now with the Govt reducing rates, it is expected that banks will finally bring down their rates too, especially lending rates, essential for the struggling corporate sector. The banks simply have no excuse now!

This reduction of interest rate on small savings was a necessary evil, it had to be done. But this is sure to hurt, especially with overall cost of living going up. Yes, “whose achche din?” will be question more often asked now.