Financial Daily from THE HINDU group of publications
Sunday, Mar 31, 2002
Money & Banking - Interest Rates
Industry & Economy - Small Savings
Govt cuts SDS to 9 pc; PF rate reduction on anvil
NEW DELHI, March 30
IN a precursor to a reduction in the return on deposits under the Employees Provident Fund (EPF) scheme, the Finance Ministry on Saturday decided to effect a 50 basis points cut in the interest paid on the Special Deposit Scheme (SDS).
The SDS interest will now be 9 per cent from April 1, 2002, as against 9.5 per cent during 2001-02. The Ministry's move would now mean that the recommendation of the Central Board of Trustees (CBT) of the EPF Organisation to retain the interest payable on EPF deposits for the year 2002-03 at the existing 9.5 per cent will not pass muster.
Considering that almost 80 per cent of the EPF monies are parked in the SDS account, the CBT will have to reconcile itself soon to a lower interest on the EPF deposits than the existing rate of 9.5 per cent. In his 2002-03 Budget, the Finance Minister, Mr Yashwant Sinha, had already announced the interest rates on a host of small savings instruments by an average of 50 basis points.
The Government also slashed the interest rate on the General Provident Fund (for Central Government employees) and on other deposits by 50 basis points to 9 per cent from April 1. It would obviously not be possible for private sector employees to obtain a higher interest on their monthly EPF balances, compared to their Government counterparts.
In fact, the CBT in its meeting in January had clearly indicated that its recommendation to retain the interest on the EPF deposits at 9.5 per cent was only any an interim one, subject to there being no change in the interest rates on small savings and the SDS. The cut in the EPF deposit rate will now be a mere formality.
As on December 31, 2001, the total EPF corpus of unexempted establishments stood at Rs 59,938.63 crore, of which Rs 47,683.74 crore (79.55 per cent) was invested in the SDS earning 9.5 per cent. The rest of the corpus was parked in bonds of public sector financial institutions (Rs 4,903.52 crore earning between 9.25 to 17.5 per cent interest), Central Government loans (Rs 4,230.59 with coupon range of 5.75 to 13.82 per cent), State Government loans (Rs 2,368.44 crore with coupon range of 9.4 to 14 per cent) and Government guaranteed loans (Rs 752.34 crore with coupon range of three to 17.5 per cent).
The reduction in EPF deposits is crucial as the latter is perceived as a floor rate for deposits of banks and financial institutions. For long, there has been talk of the need to rationalise these rates in the larger interest of developing an efficient financial market.
The Ministry has further decided to reduce the interest rates on advances and loans given to Government employees by 50 basis points for house purchase, construction and purchase of vehicles, bicycles and computers from April 1.
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