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January 2, 1999


Interest rates of small savings, employee deposits lowered

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Accepting most of the recommendations of a central committee on the issue, the Union government has reduced the interest rates on small saving schemes and deposit schemes for retired government and public sector undertaking employees and on relief bonds with immediate effect.

The rate of interest payable on relief bonds has also been reduced from ten per cent to nine per cent from today.

Consistent with the lower interest rates in public sector banks on savings accounts on term as well as recurring deposits, the rates of interests on similar instruments have also been reduced.

Consequent to the above change, the relief bonds issued on or after the aforesaid date will bear interest at nine per cent per annum and simultaneously the sale of bonds bearing interest at ten per cent per annum will cease.

It was clarified in an official release that subscription to the bonds should be in the form of cash/draft/cheque or matured relief bonds. The date of issue of bonds will be the date of receipt of subscription in cash, date of tender of draft or the date of realisation of cheque, as the case may be.

However, those investors who have already submitted valid applications of the ten per cent relief bonds till the date on which the receiving offices concerned have actually received advice of the aforesaid change in the rate of interest, will have the benefit of being issued the ten per cent relief bonds notwithstanding the date from which the revised rate applies.

The decision to reduce the interest rates on certain small saving schemes and the deposit schemes for retired government/PSU employees followed acceptance of one of the recommendations of a committee which went into the various parameters of the collections under the small saving schemes, disbursement of loans to state governments and cost of small saving schemes.

The committee was set up at a conference of finance ministers from ten states which was held in November, 1997, which discussed issues relating to small savings. The committee of exports submitted its report on September 7, 1998 to the finance minister.

The government has in principle agreed with the thrust of most of the recommendations. One of the recommendations of the committee to benchmark the rates of interests to the rates of similar instruments in banks / financial institutions has been accepted.

Following the decision, the rate on post office savings account will now be 4.5 per cent while the rates on post office time deposits for one, two, three and five years will be nine per cent, ten per cent, eleven per cent and 11.5 per cent respectively.

Similarly the rate of interest on post office recurring deposits will be 11.5 per cent. The post office monthly income account will offer 12 per cent now against 13 per cent earlier. The ten per cent bonus on maturity in this scheme will continue as also the five per cent discount on deposits in case of premature withdrawal before three years.

The Kisan Vikas Patra and the Indira Vikas Patra will now double in six years instead of five-and-a-half years. This is in keeping with the trend of rates of interest offered by All India Financial Institutions on money multiplier bonds while discounting the rates on these government of India instruments on account of the complete security assured.

The National Savings Certificate-VIII issue, for similar reasons will now offer an interest of 11.5 per cent. The pre-mature encashment values in respect of KVPs have also been revised correspondingly.

The rates of interest on the deposits scheme for retired government employees and the deposit scheme for retired PSU employees have also been revised downward to nine per cent and ten per cent.

In order to allow time for the various post offices and banks to make necessary arrangements for effecting the above changes, the acceptance of deposits in post office savings account, post office time deposits for one, two, three and five years, post office recurring deposit, the post office monthly income account, National Savings Certificate -- VIII issue, KVP, IVP and deposit schemes for retired government/PSU employees are being suspended with immediate effect.

These will be resumed as early as possible in different parts of the country and in any case not later than January 18.

The government have also decided to pass on the benefit of the lower interest cost on small savings schemes to the state/Union Territory governments. Consequently, the rate of interest on loans advanced to state/UT governments against small savings collections will be reduced from 14.5 per cent to 14 per cent effective January 1, 1999.


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