RB suggests cut in small savings rates for cheap loans

Dec 10 2019 02:36 PM
RB suggests cut in small savings rates for cheap loans

With no reduction in the repo rate on Thursday, RBI made it clear that interest rates cannot be continued to be cut at present due to inflation. But this does not mean that the scope for further reduction in interest rates is completely lost. The central bank has suggested to the finance ministry that if interest rates on small savings schemes are cut, the way for banks to make loans cheaper can be opened. The Finance Ministry fixes the interest rates on small savings schemes and in June last time they were reduced by 10 basis points (0.10 per cent).

According to Finance Ministry sources, after last week's monetary policy review, suggestions have been made to reduce the interest rates on small savings schemes during consultations with RBI. By the way, the formula to fix interest rates on small savings schemes is applicable every three months. But no changes have been made since July. It is given on the basis of profits made on government bonds during the previous quarter. The interest received on government bonds has decreased in the last two quarters. The central bank estimates a 70 to 110 basis point (0.70 - 1.10 percent) difference between the interest rate payable on government-controlled small savings schemes and interest on government bonds during the June – August quarter. In the second quarter of the current financial year, the difference between the above was 18-62 basis points. RBI Governor Shaktikanta Das, while reviewing the monetary policy, had also mentioned that interest rates should have been cut in the previous quarter.

The RBI report, which dealt with the introduction of monetary policy, even said that one of the major reasons behind not getting the full benefit of the reduction in the repo rate to the general public is the high rates of interest on small savings schemes. RBI calculation says that the interest rate of short-term plans can be reduced by 70-110 basis points. RBI says that the cost of interest payable on these small savings schemes is very high to the banks, due to which the cost of their funds increases. And they are not able to make loans cheaper. The RBI had cut the repo rate by 135 basis points during February-October 2019, although the loan rates from banks have been cut by only 49 basis points.

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