Listen to this article:
As expected, recent decisions of the Reserve Bank of India to increase the policy repo rate under the liquidity adjustment facility by 40 basis points have impacted the interest rates paid by the commercial banks to its depositors. Besides, an increase in the rate of interest in the near future can’t be ruled out in view of the inflationary pressure in the economy. In this context, there is a need to relook at the returns of different small savings schemes of the Union government.
The domestic household savings mobilised through small savings schemes – retailed primarily through the post offices, nationalised banks and identified private sector banks – is perceived by many as a liability to the exchequer.
These schemes, as believed generally, are run for the economic well-being of the senior citizens and retired employees in the organised sector by offering a rate of return that is higher than the one prevailing in the market, and in turn, makes the schemes unviable on its own.
We need to examine this perception critically.
How NSSF is administered
All deposits in small savings schemes are credited to National Small Savings Fund (NSSF), and withdrawals and maturity proceeds are also made out of that fund. The Fund thus constitutes a part of the nation’s public account. Therefore, the finance ministry, for all practical purposes, acts as the trustee of the fund.
The balance of the fund was earlier invested in the special securities issued by the state and Union governments as per the norms decided by the Union. The state governments, who were earlier the prime borrowers from this fund, have been relying on market borrowings after 14th Finance Commission.
All states except Arunachal Pradesh, Delhi, Kerala, and Madhya Pradesh have withdrawn from the scheme and the balance fund today is invested in Union government securities or is used to facilitate off-budget borrowings by the infrastructure companies and public sector units owned by the Union government. The low yield of these investments not only makes the depositors suffer but also makes the fund unviable on its own.
NSSF, a liability?
The 2011 Committee on the NSSF recommended that the “secondary market yield of the Central government securities of comparable maturities should be the benchmark of various small savings schemes”.
Since then, there has been a substantial decline in the administered rates of return of small savings schemes. The rates are nowadays adjusted quarterly. The returns in recent years hardly cover the average rate of retail inflation.
This is a matter of concern more to the older generation and their number is not insignificant as the age of superannuation in India has not been enhanced in the same proportion along with the increased life expectancy. This is perhaps keeping in mind the challenges of youth unemployment.
As the finance ministry primarily depends on the network of the post offices and banks, the expenses to run the scheme is minimal. It reimburses the operator the estimated expenses on the total number of transactions, based on stringent establishment norms per transaction. The reimbursement amount worked out to be only Rs 7,056 crore in 2020-21.
The commission paid to the agents, engaged in the past by the state governments for the promotion of these schemes, was also reduced from 2% to 0.5% over the years. This amount worked out to be Rs 3,218 crore in 2020-21. Thus, total expenditure was less than Rs 10,500 crore in 2020-21 for a gross mobilisation of Rs 9,37,355 crore: less than 1.12%.
As such the narrative that NSSF is a liability to the central exchequer is hardly based on facts.
NSSF is lending to the Union government tentatively at a rate of 7.4%, whereas the rate of borrowing from the market, when the loan is for 10 years, is less than that.
According to media reports, the Union government borrowed (internal debt) an estimated Rs 4,80,000 crore in 2020-21 from the fund which approximately covered a quarter of its deficit financing needs.
If the government is to pay a higher cost, why should they borrow from the NSSF and allow a so-called “inefficient arrangement” to perpetuate?
Alternatively, the Union government could borrow from the market to meet its own requirements and engage professional fund managers to manage the NSSF through investments in the market. Of course, this should be done under well-defined guidelines and under the supervision of experts engaged by the government.
Even if the professional fund managers are allowed to invest the fund in a basket of conservative low-risk instruments, with limited exposure to equity, return in all probability would have been sufficient to give an additional yield of 1% to 1.5% to the depositors after meeting all costs to operate the schemes.
The Pension Fund Regulatory and Development Authority (PFRDA), Postal Life Insurance (PLI) Fund, and Army Group Insurance Fund are some examples in the government sector, which are managing the funds well without compromising the interest of the stakeholders.
Insurance Regulatory and Development Authority (IRDA) guidelines provide a life insurance company to invest 25% of its investible surplus in government securities, at least another 25% in other approved securities and not less than 15% in infrastructure and social sector. The guideline further says that not more than 20% of the investment is to be governed by exposure and not more than 15% can be invested other than in approved investments.
It’s more than two decades now that these norms have come into force and LIC and other life insurance companies are following them. The interest of the policyholders has not been compromised in spite of some degree of market exposure.
Perhaps it is high time we consider limited market exposure of the net accretions in the NSSF, at least in the interest of the middle-class depositors. The Union government may consider providing the depositors the sovereign guarantee for a minimum threshold yield to mitigate risk.
The narrative of doing charity to the depositors should end someday.
Gautam Bhattacharya is a former civil servant. He was the chief vigilance officer of a pan-India governmental body and held charges of CVO in leading PSUs.