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PPF rate cut: low interest regime is not easy to establish, aver bankers

India's government on Friday announced a cut in interest rates on small savings schemes and public provident fund.

The interest rate on PPF was cut to 11 per cent from 12 per cent.

A government statement said the new interest rates will be effective from January 15, 2000.

Analysts said this will clear the way for across-the-board cut in interest.

An official statement said consistent with the lower interest rates in public sector banks on term as well as recurring deposits, the rates of interest on similar instruments have been reduced.

The rate on post-office time deposits for one, two, three and five years will be eight per cent, nine per cent, ten per cent and 10.5 per cent respectively. Similarly, the rate of interest on post office recurring deposits will be 10.5 per cent.

In addition, to further assist states and Union Territories, it has been decided that share against the net collections under small savings scheme will be increased from 75 per cent to 80 per cent concommitantly. The last revision in this share was in 1987.

Banks and the post offices on Friday suspended accepting deposits under the public provident fund after instructions from the government that the interest rates are being cut for various national saving schemes.

By deciding to cut interest on PPF and the NSS, the government is sending a strong signal to the banks to revise their deposit and lending rates, senior bankers said.

However, they felt that the banks would find it difficult to lower the interest rates since the market forces would exert opposite pressure.

The post offices were refusing today deposits from the public and were showing them a letter from the Department of Posts to the Chief Postmaster and Senior Postmasters. The letter read as follows:

''A Finance Ministry letter No.18-1-'99 NSII dated January 13, 2000 has conveyed suspension of collection under various saving instruments and PPF in the post offices with immediate effect. Therefore you are requested not to accept deposits in accounts of SB, TD, RD, MIS, NSS, PPF, NSC and KVPs with immediate effect. However, withdrawals will continue. Notification effecting reduction of rates will follow.''

Bankers felt that with the boom conditions in the secondary market the small savings are drifting towards mutual funds giving them handsome returns. Besides, with the most of the industrial sectors recording high growth, the demand for credit is increasing, reducing the interest cut capability of the banks.

The benchmark interest rates on PPF is 12 per cent with tax incentives which will now be reduced by at least 50 basis points.

Various provident funds and government small savings schemes account for a whopping Rs 3.3 trillion and the interest rates cut would have a significant bearing on the interest burden of the government struggling to restrict its borrowings.

UNI

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