The Hindu Business Line : Redemption of 10.5 pc special securities to hit NSSF income

The earning power of the National Small Savings Fund (NSSF) — the accumulations from which go to service the interest on post office deposits, Public Provident Fund, National Savings Certificate, Kisan Vikas Patra, etc. — would stand significantly eroded by the Centre's recent decision to swap Rs 22,665 crore worth of 10.5 per cent interest-bearing special securities issued by it to the fund in the past, with fresh securities of 5.96 per cent coupon.

To understand the implications, a little background is in order. At the time when the NSSF was established on April 1, 1999, the Centre's entire outstanding small savings liabilities on that date (totalling Rs 1,76,221 crore) were converted into non-marketable special securities bearing 10.5 per cent interest.

The earnings from these securities constituted a significant part of the income for the fund, which was used to defray the interest payable to subscribers of small savings instruments.

In 2002-03, for instance, the NSSF's total income stood at Rs 34,948.28 crore, of which Rs 20,118.56 crore accrued from its investment in the 10.5 per cent special securities issued by the Centre on April 1, 1999.

But since end-March 2003, the Centre has begun periodically redeeming the 10.5 per cent special securities. The redemption sums accruing to the NSSF have, in turn, been re-invested in fresh special securities that the Centre has issued at rates way below the original 10.5 per cent.

The first instalment of redemptions monies worth Rs 13,766 crore were re-invested by the NSSF on March 28, 2003 in special securities bearing 7 per cent interest.

This was followed by two more instalments of Rs 32,602 crore and Rs 13,609 crore on September 30, 2003 and March 31, 2004, which were re-invested in securities with even lower coupons of 6 per cent and 5.95 per cent, respectively.

And in the latest tranche of redemption, carried out on December 31, 2004, another Rs 22,665 crore worth of 10.5 per cent special securities have similarly been swapped with fresh such non-marketable 20-year securities bearing 5.96 per cent interest.

In all, therefore, the Centre has managed to reduce the cost of servicing debt aggregating Rs 82,642 crore owed to the NSSF from 10.5 per cent to around 6.25 per cent. The annual savings in interest outgo for it from this exercise comes to roughly Rs 3,500 crore.

While this is good news for the Centre, it is not so though for the NSSF, which would suffer a depletion in its income by a corresponding sum. The only way out for the fund, then, is to cut its own interest outgo, which means lowering the returns to small savings subscribers. The alternative is to risk a big hole in its accounts, a la the Unit Trust of India or the Employees Provident Fund Organisation.

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