Post office savings bank deposits without any fixed maturity will earn interest of 4 per cent up from 3.5 per cent now.
And interest rates on other small saving instruments, such as the National Savings Certificate, will be indirectly linked to the market. The new rates could be notified from July 1, 2011 for the current fiscal year.
High interest rates offered by the banks seem to be luring people to withdraw money from the small savings. The Government was expecting Rs 24,182 crore through small savings during this fiscal, but till date far from any fresh accretion, there has been a net outflow of approximately Rs 11,000 crore. This means people withdrew more money than making fresh deposits.
There is also a proposal to discontinue the Kisan Vikas Patra scheme.
A senior Government official told Business Line, “The Finance Minister, Mr Pranab Mukherjee, has approved the proposals based on the Shyamala Gopinath Committee. Now, the new mechanism for the small saving instruments will be effective after the new system is notified.”



From the next financial year, the Government is likely to announce the new rates at the beginning of the financial year, to be effective from April 1.
The thinking in the Finance Ministry is that there is no need to deregulate postal deposit rates as has been done in the case of saving bank deposits in banks.
The calculation of the interest on savings deposits in post offices will be done on a daily product basis but only after the post offices are fully computerised. For this, “we will have to wait for the notification,” the official added.
The Government has also accepted the Committee's recommendation on reducing the tenure for NSC from six to five years. But there will be a special NSC with tenure of 10 years.
The interest rates on both will be benchmarked to the weighted average of the yield of the government bonds during previous years. At present a six-year NSC earns a fixed annual rate of 8 per cent.
The official said that the Government has also approved the formula for sharing the net collections of small savings between the Centre and the States. The Committee recommended that the mandatory component for States could be lowered to 50 per cent from 80 per cent at present.
State Governments could exercise the option of either 50 per cent or 100 per cent at the beginning of each fiscal for administrative convenience. The balance amount could either be taken by the Centre or on-lent to other States if they so desire, or could be on-lent for financing infrastructure.
Shishir.s@thehindu.co.in
(This article was published in the Business Line print edition dated November 8, 2011)