Prepared by Sudip Mohapatra.
This chapter excludes small savings schemes run outside the exclusive purview of the Post Office Savings Bank such as the Deposit Scheme for Retiring Government Employees, the Deposit Scheme for Retiring Employees of Public Sector Companies, and the Public Provident Fund scheme. These schemes are largely administered through the commercial banks.
The IVP was the first certificate scheme designed to attract deposits from high-income groups. However, it fell out of favor after the introduction of the KVP (which had better liquidity features), and was discontinued in July 1999.
Prior to 1999, the certificate offered to double the initial deposit amount in 5½ years implying a compound annual interest rate of 13.4 percent. Following the recommendations of the Gupta Committee, the interest rate on the KVP was reduced on January 1, 1999, in line with rates offered by the public sector financial institutions, so that the certificate matured in 6 years. With the most recent cut in postal savings rates (March 1, 2001), the certificate matures in 7¼ years.
Mohanty, M. S., and N. Raje, 1998, “Effective Cost of Small Savings,” RBI Occasional Paper, Vol. 19 No 3, September.
The cost of commissions, which are paid once to the agents when the deposit is raised, is estimated by spreading the amount of the commission over the maturity of the scheme. The commission rates are as follows: (i) for Post Office Savings Account no incentive is paid; (ii) for Recurring Time Deposit the commission is 4 percent on the amount of deposit (exclusively for MPKBY agents); (iii) for Post Office Time Deposit, Post Office Monthly Income Scheme, NSC-VIII, NSS 1992 and KVP, the commission is 1 percent of the amount of deposit; and (iv) for Deposit for Retiring Government Employees and Deposit for Retiring Employees of the Public Sector Companies the incentive is 0.5 percent of the deposit amount. These do not include extra commissions paid by state governments to agents for large deposits.
This is calculated for 1998/99 by dividing the reimbursement paid to the Department of Posts by the Finance Ministry (Rs 9,698 million) plus the cost of running the NSO (Rs 158 million) by the gross collection of postal deposits (Rs 548.3 billion).
Similar concerns have been expressed regarding other government contractual savings schemes, e.g., the Public Provident Fund scheme (PPF), the General Provident Fund scheme (GPF), and the Employee Provident Fund scheme (EPF).
The central government responded to these concerns by cutting administered interest rates around budget time in each of the last three years. While the differentials between interest rates on postal savings schemes and commercial bank deposits have narrowed, the administered rates on government sponsored saving instruments continue to imply a lower bound for bank deposit rates.
See the Report of the Prime Minister’s Economic Advisory Council, January 2001 and the 2001/02 Budget Speech.
Similar recommendations are made in the Shome Report of The Advisory Group on Tax Policy and Tax Administration for the Tenth Plan (Planning Commission, May 2001), which argues for the abolition of various incentives under the Income Tax Act, including those under Sections 88 and 80L.
The states have suggested a number of options including: (i) treating small savings loans as loans in perpetuity; (ii) a complete write-off past loans (principal and interest); (iii) waiving or reducing past interest; (iv) providing future loans interest-free or as grants. These options were generally rejected by the recent report of the Eleventh Finance Commission.