PF to fetch higher returns, postal deposits & KVP to earn less

NEW DELHI/ CHENNAI: The Employees Provident Fund Organization on Tuesday proposed raising the interest rate to 8.8% this year, compared to 8.75% in 2014-15.
While the government announced a 25 basis point reduction in rates on post office deposits and Kisan Vikas Patras (KVP) from April — indicating its preference for long-term savings while seeking lower bank fixed deposit and lending rates in the next financial year.
The government has left interest rates on the popular public provident fund, National Savings Certificate, Sukanya Samridhi Yojana, Senior Citizen Savings Scheme and the Monthly Income Scheme unchanged for the time being, while promising quarterly reset in rates from next year.
Although the notification of the new small savings scheme rates was anticipated, the decision of EPFO's board of trustees came as a surprise as it deviated from the finance panel's recommendation to pay 8.95% interest during the current financial year, a move that provoked protests from trade union representatives. Labour minister Bandaru Dattatreya, who heads the EPFO's central board of trustees, suggested that rate decided at Tuesday's meeting was interim and could be revised. He also pointed to the falling rate regime, indicating that the decision to settle for a lower payout was done at the behest of the finance ministry, which has to notify the rates.
"The chairman (Dattatreya) said the market is going down and hence higher rate cannot be recommended now... The minister said the rate is interim, he is changing the system of deciding on the interest rate," said Prabhakar J Banasure, a Bharatiya Mazdoor Sangh nominee on the EPFO board. He said even with 8.95% interest rate, EPFO would have been left with a surplus of Rs 91 crore, compared to Rs 673 crore at 8.8%.
"The rate is based on an estimate of the amount available. Once the books are audited, a factual report will be submitted before the ministry and the possibility of increasing the rate will be seriously considered," Dattatreya said.
The government, however, didn't hide its bias for lower deposit and lending rates while announcing a reduction in small savings rates. "The small savings interest rates are perceived to limit the banking sector's ability to lower deposit rates in response to the monetary policy of the Reserve Bank of India. In the context of easing the transmission of the lower interest rates in the economy, the government also has to take a comprehensive view on the social goals of certain National Small Savings Schemes," the finance ministry said in a statement.
Over the past few years, banks and RBI have repeatedly pointed out that higher rates on small savings schemes resulted in individual preferring them over bank deposits. As a result, they argued, banks have not been unable to pass on the entire benefit of the rate reduction by RBI. Bank cite the stickiness in deposit rates for their inability to lower lending rates further. While the central bank has reduced key policy rates by 125 basis points (100 basis pints equal a percentage point), banks have cut rates by up 70 basis points.
To get banks to offer deeper cuts at least in the next financial year, the government said that the 25 basis point spread that one-, two- and three-year term deposits, KVPs and 5-year recurring deposits enjoy over government bonds with comparable maturity will reduce from April. This will "make them closer in interest rates to the similar instruments of the banking sector. This is expected to help the economy move to a lower overall interest rate regime eventually and thereby help all, particularly low-income and salaried classes", the government said.