Govt will rationalise interest rates on small savings: FM

New Delhi, Mar 10 (UNI) Finance Minister P Chidambaram today told the Lok Sabha that while the government proposes to rationalise interest rates on small savings taking into account the inflation rate, it will ensure a higher rate of return on such savings for senior citizens.

Replying to a spate of supplementaries during question hour relating to bonus on Monthly Income Accounts, Mr Chidambaram, however, said the government's decision not to pay bonus on the deposits made under the Post Office Monthly Income Account (POMIA) will not impact the growth of small savings nor adversely affect the interest of small savers.

The Finance Minister said the effective rate of return on small savings works out to 8.27 per cent and to senior citizens it was 9 per cent, which were decent, taking into account the fact that inflation rate was low and ranged between 4 to 5 per cent. ''These are one of the highest rates of interest in the market.'' In this connection, Mr Chidambaram categorically stated that the government does not propose to hike the rate of interest on small savings or for senior citizens.

He said hiking the rate of interest increases the cost of borrowings, which will hit the productive sectors of the economy.

Mr Chidambaram cited the example of Japan where the rate of interest ranged between 0 to 0.4 per cent and said the country must eventually move to these levels to remain competitive globally.

He clarified that bonus would not be paid on the deposits made in accounts opened on or after February 13, 2006 under POMIA scheme.

However, deposits in accounts opened before February 13, 2006 would continue to be eligible for bonus as hitherto.

''The amendment has been made to align the effective yield on deposits under the scheme with other comparable savings instruments,'' Mr Chidambaram said.

Simultaneously the rates of penalty for premature withdrawal of deposits under the POMIA scheme have also been modified with effect from February 10, 2006. If the account is closed between one to three years from the date of opening of the account, deduction at the rate of 2 per cent of the deposits (as against the earlier rate of 3.5 per cent) and if the account is closed after three years, deduction at the rate of one per cent of the deposit will be made.

POMIA is one of the small savings instruments offered by the government.

Mr Chidambaram said the effective return under the POMIA scheme at eight per cent per annum payable monthly was still higher than returns on other comparative savings instruments. He said while the revised penalty rates will provide relief to the depositors who need to close their accounts before three years, the nominal penalty of one per cent after three years is expected to encourage the depositors to hold their deposits till maturity.

UNI GS LR DB1316