NEW DELHI: The finance ministry is mulling cutting the interest paid out on small savings schemes by around 0.5 per cent as the difference between interest rates offered by banks on fixed deposits and those offered by small savings schemes like post office deposits, Kisan Vikas Patras (KVPs) and National Savings Scheme (NSC) have increased over time.
“With the RBI signalling a lower interest rate regime in the future, banks have to cut deposit rates to be able to pass on lower lending rates. However, one constraint for that has been the competition offered by small savings schemes, which include Public Provident Fund, NSC, KVPs and post office deposit schemes,” said finance ministry officials.
Currently, KVP offers 7.3-7.7 per cent interest depending on the tenure. PPF and NSC offer 8 per cent and the post office deposit scheme 7-7.8 per cent. State Bank of India, whose deposit rates act as a benchmark for most banks, offers 5.75 per cent to 7 per cent for fixed deposits, besides a half per cent extra for senior citizens.
In the run-up to the elections, the finance ministry had refrained from cutting the rates on small savings schemes.The RBI has cut the Repo rate at which the central bank lends to other banks in three tranches by 0.75 per cent in the current calendar year. However, banks laden with bad debt and scared of losing customers, have cut their lending rates by far less despite prodding from the RBI.
The repo rate has now come down to 5.75 per cent and the reverse Repo rate (at which banks lend to the RBI) to 5.50 per cent. However, a typical bank’s lending rate varies between 8.75 per cent and 16 per cent, depending on the credit profile of the borrower.
However, bankers have also warned the North Block that too low a fixed deposit rate could prove to be counterproductive with savings moving away from the banking sector to other avenues.