New rules for NSC, KVP, PPF

A government panel, set up to review the small investment schemes of post offices and banks, has recommended discontinuation of the popular Kisan Vikas Patra, among other changes.

The committee has also proposed a 0.5% raise in the interest rate for post office savings account to 4%, reduction in the maturity period of National Savings Certificates (NSCs) to five years from six, and raising the annual contribution limit in Public Provident Fund ( PPF) toRs 1 lakh, from the current Rs 70,000.

The panel, headed by Reserve Bank of India (RBI) deputy governor Shyamala Gopinath, submitted its report to the finance minister on Wednesday, a finance ministry statement said.

The proposals are in line with the suggestions made by experts, the RBI and commercial banks to ensure transparency, have market-linked rates, and reform the small savings plans offered by the government.

If the proposals are accepted, it could lead to big changes in the way the National Small Savings Fund (NSSF) is managed and the returns it generates for investors.

The finance ministry had formed the panel after it accepted the recommendations of the 13th Finance Commission to examine all aspects of the National Small Savings Fund.

To address the need for a long-term investment instrument, it has recommended introduction of a 10-year NSC scheme. The panel has also adviced benchmarking of interest rates on other small savings schemes to rates of government securities of similar maturity with positive spread of 25 basis points with two exceptions.

The first is 100 basis points spread for senior citizens' schemes, keeping in view its social objective, and the second is 50 basis points spread for the recommended 10-year NSC, keeping in view of its higher illiquidity.

These rates may be notified by the government afresh at the beginning of every financial year based on the average yields on government securities in the previous calendar year.

Bankers say the recommendations are in the right direction. "We will have to study them in detail, but it certainly looks like a first step in the right direction," said RK Bansal, executive director, IDBI Bank.

The committee has proposed that the mandatory component of investment of net small savings collections in state government securities be reduced to 50%. 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 balance amount could either be invested in central government securities or could be on-lent to other states on basis of requirement or could be lent for financing infrastructure projects requiring long-term finance, according to the panel.

It has been proposed that the tenure of these loans may be reduced from the current 25 years, including moratorium of 5 years, to 10 years.

Source: Economic Times