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Tuesday, June 7, 2011

Recommendation for discontinuation of KVP Scheme- Reduction of Period of NSC from 6 year to 5 year


The committee, headed by the deputy governor of RBI, examined all aspects of the design and administration of NSSF to bring about much delayed reforms, including transparency and linking rates to the market. The committee, which submitted the report to finance minister Pranab Mukherjee nearly a year after its constitution, The recommendation of the Shyamala Gopinath committee on National Small Savings Fund (NSSF)

1.  Scrapping of Kisan Vikas Patra (KVP) and continuation of all other small savings schemes with certain modifications
2    Raising the annual investment cap on public provident fund to Rs 1 lakh from Rs 70,000.

3.    Suggested lowering the maturity period of the popular post office monthly income scheme and National Savings Certificate (NSC) besides raising the interest rate on post office savings bank account to 4 per cent, on par with savings accounts in commercial banks.

4.   The committee has also recommended reduction in maturity of monthly income scheme and NSC from six to five years.

5.    Recognizing the need for a long-term investment opportunity after discontinuation of KVP, the committee also suggested introducing 10-year NSCs.


6.  Abolition of payment of commission to agents on PPF and senior citizen savings scheme and reduction of commission paid on standardised agency system to 0.5 per cent from 1 per cent.


7.Reduction in commission payable under Mahila Pradhan Kshetriya Bachat Yojana on recurring deposits from 4 per cent to 1 per cent in a phased manner over three years. These recommendations seem to be in line with the committee's thought process where the total cost of operation of NSSF should be contained within 0.7 per cent of the outstanding small savings.

The seven-member co­m­mittee said there should be 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 exception is 100 basis points spread for senior citizen schemes, keeping in view its social objective, and the second exception is 50 basis points spread for newly recommended 10-year NSCs, keeping in view of its higher illiquidity. The committee has recommended that 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. A major recommendation is the mandatory component of investment of net small savings collections in state government securities be reduced from 80 per cent to 50 per cent. The balance amount could either be invested in central government securities or lent to other states on basis of requirement. This could also be lent for financing infrastructure projects requiring long-term finance. The tenure of these loans may be reduced from 25 years, including moratorium of 5-10 years. The committee has not recommended any change on TDS on small savings instruments but is of the view that the issue of tax deducted at source on small savings instruments may be considered by the government in the Direct Taxes Code.

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