National Small Savings Fund
Small Saving schemes have been always an important source of household savings in India. Small savings instruments can be classified under three heads. These are: (i) postal deposits [comprising savings account, recurring deposits, time deposits of varying maturities and monthly income scheme(MIS)]; (ii) savings certificates [(National Small Savings Certificate VIII (NSC) and Kisan Vikas Patra (KVP)]; and (iii) social security schemes [(public provident fund (PPF) and Senior Citizens‘ Savings Scheme(SCSS)].
A “National Small Savings Fund” (NSSF) in the Public Account of India has been established with effect from 1.4.1999. A new sub sector has been introduced called “National Small Savings Fund” in the list of Major and Minor Heads of Government Accounts. All small savings collections are credited to this Fund. Similarly, all withdrawals under small savings schemes by the depositors are made out of the accumulations in this Fund. The balance in the Fund is invested in Central and State Government Securities. The investment pattern is as per norms decided from time to time by the Government of India.
The Fund is administered by the Government of India, Ministry of Finance (Department of Economic Affairs) under National Small Savings Fund (Custody and Investment) Rules, 2001, framed by the President under Article 283(1) of the Constitution. The objective of NSSF is to de-link small savings transactions from the Consolidated Fund of India and ensure their operation in a transparent and self-sustaining manner. Since NSSF operates in the public account, its transactions do not impact the fiscal deficit of the Centre directly. As an instrument in the public account, the balances under NSSF are direct liabilities and constitute a part of the outstanding liabilities of the Centre. The NSSF flows affect the cash position of the Central Government.
Prior to April 1999, deposits and withdrawals by subscribers were made from the public account and interest payments to subscribers and interest receipts from the States were recorded in the revenue account of the Consolidated Fund of India. Disbursement of loans against small savings made to the States and repayment of such loans were recorded in the capital account of the Consolidated Fund of India. All the payments against the cost of operating the fund were also debited from the Consolidated Fund.
The Committee on Small Savings (Chairman: Shri. R.V. Gupta), which submitted its report in February 1999, examined and identified some lacunae in the prevailing accounting procedure of the small savings like (i) There was no formal transfer of funds collected under small savings in the Public Account to the Consolidated Fund. (ii) Loans to the States/Union Territories were made out of the Consolidated Fund without corresponding receipts. (iii) Transactions in small savings could not be segregated for the purpose of analysing their financial viability.(iv) The on-lending to States from the small savings collections was treated as part of Central Government‘s expenditure and added to Central Government‘s fiscal deficit. Therefore, other things remaining the same, an increase in small savings collections led to an increase in fiscal deficit.
In the light of the above, the Committee recommended creation of a separate Fund called the National Small Savings Fund (NSSF) within the Public Account. NSSF would formalise the Central Government’s use of small savings collections accruing in the Public Account to finance its fiscal deficit. Further, NSSF was expected to lend transparency to the accounting system, enable an easy examination of the income and expenditure of small savings process, bring into sharp focus the asset-liability mismatch and pave the way for correction.
Operation of NSSF
All deposits under small savings schemes are credited to NSSF and all withdrawals by the depositors are made out of accumulations in the Fund. The collections under the small saving schemes net of the withdrawals are the sources of funds for the NSSF. NSSF invests the net collections of small savings in the special State Government securities (SSGS) as per the sharing formula decided by the Government of India. The remaining amount is invested in special Central Government securities (SCGS) with the same terms as that for the States. These securities are issued for a period of 25 years, including a moratorium of five years on the principal amount. The special securities carry a rate of interest fixed by GoI from time to time. The rate of interest has remained unchanged at 9.5 per cent per annum since April 1, 2003. The NSSF is also permitted to invest in securities issued by IIFCL.
The income of NSSF comprises of the interest receipts on the investments in Central, State Government and other securities. While the interest rate on the investments on the Central and State share of net small saving collection is as per the rates fixed from time to time, the interest rate on the reinvestment of redeemed amounts are at market rate for 20 year Government Securities. The expenditure of NSSF comprises interest payments to the subscribers of Small Savings and PPF Schemes and the cost of operating the schemes, also called management cost.
From the year 2012-13, the interest rates on various Small Savings Schemes (SSS), were being recalculated and notified in the month of March every year. These rates were applicable for the next financial year. This was being done in line with the recommendations of the Shyamala Gopinath Committee to ensure that the interest rates of Small Savings Schemes are market linked. On 16th February, 2016, it was notified by the Government that instead of annual resetting of interest rates for the upcoming financial year, the interest rates would be reset every quarter based on the G-Sec yields of the previous three months. For instance, the interest rates for various Small Savings Schemes for the 1st quarter of 2016-17 would be recalculated with reference to the G-Sec yields of equivalent maturity for the months December 2015 to February 2016. This is done because, 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 particularly in the newly launched inflation targeting regime, while taking a comprehensive view on the social goals of certain National Small Savings Schemes, it has been decided by the Government that the following shall be implemented with effect from 1.4.2016 with regard to National Savings Schemes:
- The Sukanya Samriddhi Yojana, the Senior Citizen Savings Scheme and the Monthly Income Scheme are savings schemes based on laudable social development or social security goals. Hence, the interest rate and spread that these schemes enjoy over the G-sec rate of comparable maturity viz., of 75 bps, 100 bps and 25 bps respectively have been left untouched by the Government.
- Similarly the spread of 25 bps that long term instruments, such as the 5 yr Term Deposit, 5 year National Saving Certificates and Public Provident Fund (PPF) currently enjoy over G-Sec of comparable maturity, have been left untouched as these schemes are particularly relevant to the self-employed professional and salaried classes. This will encourage long term savings.
- The 25 bps spread that 1 yr., 2yr. and 3 yr. term deposits, KVPs and 5 yr Recurring Deposits have over comparable tenure Government securities, shall stand removed w.e.f. April 1, 2016 to 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 compounding of interest which is biannual in the case of 10 yr National Saving Certificate (discontinued since 20.12.2015), 5 yr National Saving Certificate and Kisan Vikas Patra, shall be done on an annual basis from 1.4.16.
- Premature closure of PPF accounts shall be permitted in genuine cases, such as cases of serious ailment, higher education of children etc,. This shall be permitted with a penalty of 1% reduction in interest payable on the whole deposit and only for the accounts having completed five years from the date of opening.