Following are the small savings schemes covered under NSSF and on which the recommendations are made in the report:
| Schemes / Rules | Implementing Agency |
| Post Office Savings Account | Post Offices |
| Post Office Time Deposit – 1, 2, 3 and 5 years | Post Offices |
| Post Office Recurring Deposit | Post Offices |
| Post Office Monthly Income Account (MIS) | Post Offices |
| Senior Citizen Savings Schemes (SCSS) | Post Offices and designated branches of public sector bank |
| Kisan Vikas Patra (KVP) | Post Offices |
| National Savings Certificate (VIII Issue) (NSC) | Post Offices |
| Public Provident Fund (PPF) | Post Offices and designated branches of public sector bank |
Source: Committee Report
The report acknowledges the importance of small saving schemes:
"Small Saving schemes have been always an important source of household savings in India. Although these instruments are technically not Government Securities and do not have any explicit Government guarantee, their legacy has given them characteristic of being equivalent to that of a Sovereign liability. These schemes have been extremely popular amongst a large number of small investors in India who seek to invest in a secure instrument. At the same time, these instruments have been treated as a means of providing social benefit to the small savers."
Hence the benefits these schemes provide to various sections of the population especially small savers are beyond doubt. In this article, Bachhat list downs key recommendations made by the committee which directly impacts the investors.
Changes in interest rates:
One of the key recommendations of the committee relates to the interest rates. The committee recommends that, other than for savings deposit, interest rates for all other instruments should be benchmarked against secondary market yields on Central government securities of comparable maturities and should be reset yearly. It means that as the interest rates of government securities rises, the interest on these securities shall also increase and vice versa.
The committee has; depending on the instrument, its liquidity and its tenure; also recommended a spread of minimum 25 basis points (bps) vis-Ã -vis government securities of comparable maturities. 100 bps is equal to 1 percentage point. The spread is larger for NSC (50 bps) and Senior Citizen Savings Scheme (100 bps). For eg: If a comparable security for PPF is trading at 8%, then the interest rate on PPF for the reference period shall be 8.25%.
Further, to avoid year-on-year volatility, cap of 100 bps has been recommended so that the rates are neither raised nor reduced by more than 1% from one year to the next, even if the benchmark rates fluctuate by higher margins. These rates shall be fixed in advance and shall be known before the start of the financial year.
Committee recommends that interest rates on postal savings deposits should be in line with rates offered on bank’s savings account and be increased to 4% from current 3.5%. Further, the interest should be calculated on a daily basis on such deposits.
Other Recommendations:
1. Option of premature withdrawal of time and recurring deposits with provision to pay lower interest rate in such cases.
2. Abolition of 5% maturity bonus on Monthly Income Scheme and reduction in tenure from 6 years to 5 years.
3. Increase in annual investment limit for PPF to Rs. 1 lakh. To discourage premature withdrawal, interest rates on advances against PPF deposits should be 2% higher than the prevailing PPF interest rate (as against 1% at present).
4. NSC to be available with maturities of 5 years and 10 years (as against 6 years NSC at present) with interest rates linked to comparable G-sec rates. No income tax exemption under Section 80C on accrued interest from NSC.
5. The committee has also recommended reduction in commission paid to agents for the products sold. The table below gives the existing and the proposed commission structure. This and similar changes which happened in mutual fund industry earlier, will lead to emergence of fee based financial service industry wherein agents will start charging customers directly for the services provided by them.
| Schemes | Existing Commission % | Proposed Commission % |
| Kisan Vikas Patra | 1 | 0.5 |
| Post Office MIS | 1 | 0.5 |
| Post Office Time Deposits | 1 | 0.5 |
| National Savings Certificates | 1 | 0.5 |
| Senior Citizen Savings Schemes | 0.5 | NIL |
| PPF | 1 | NIL |
| Post Office Recurring Deposits | 4 | Reduce 1% p.a. for 3 years. 1% thereafter. |
Source: Committee Report
Effect on the current interest rates
Assuming that the Government accepts these proposals and implements the same with effect from 1st July 2011, the revised administered interest rates based on above recommendations shall be as follows:
Administered Interest Rates for July 1, 2011 to March 31, 2012
| Instrument | Current Rate (%) | Proposed Rate (%) |
| Savings Deposits | 3.50 | 4.00 |
| 1 Year Time Deposits | 6.25 | 6.80 |
| 2 Year Time Deposits | 6.50 | 7.20 |
| 3 Year Time Deposits | 7.25 | 7.50 |
| 5 Year Time Deposits | 7.50 | 8.00 |
| 5 Year Recurring Deposits | 7.50 | 8.00 |
| 5 Year SCSS | 9.00 | 8.70 |
| 5 Year MIS | 8.00 (6 yr MIS) | 8.00 |
| 5 Year NSC | 8.00 (6 yr NSC) | 8.00 |
| 10 Year NSC | New instrument | 8.40 |
| PPF | 8.00 | 8.20 |
Source: Committee Report
Bachhat’s take
Above recommendations, if implemented, will have long term impact on the way individuals save. For eg: One will be required to consider the variation in interest rates, which hitherto were more or less constant, while planning for his retirement savings. Reduction in agency commission will ensure that products are sold to investors on the basis of their merits. Though these recommendations shall bring year-on -year variability in interest rates, provision of cap and floor of 100 bps shall limit the impact of such variability.
Do you agree with the recommendations made in this report? Do share your views and suggestions on this article in the comment section below.
