The State Bank of India has suggested that instead of cutting the interest rate on the Public Provident Fund (PPF), the Centre should have tweaked it according to investors’ age.

The ideal approach would be to immediately shift to an age-wise interest rate structure, with a higher than market rate for those over 45, and rates linked to long-term bank deposit rates for those under 45, said a research report by the bank.

Further, the interest rate on the Sukanya Samriddhi account should have been left untouched, given its social objective of protecting the girl child, the report added.

The Centre on Friday cut interest rates on small savings schemes by 60-130 basis points with effect from April 1.

The new interest rate on the hugely popular Public Provident Fund (PPF) scheme will be 8.1 per cent (against 8.7 per cent now). For the Sukanya Samriddhi scheme, the interest rate will be 8.60 per cent (9.20 per cent).

In its ‘Ecowrap’ research report, India’s largest bank said an age-wise interest rate structure would ensure a lower lending rate structure (in the economy), adequate returns for senior citizens, lower interest expenditure and run for at least 15 years.

‘Remove lock-in period’ As the interest rate on small savings schemes will be reset every quarter, the report said the Centre should ideally remove the current 15-year lock-in period for PPF and give investors the option to withdraw their money within a stipulated time.

Furthermore, the Centre could introduce some variant of a pension-linked annuity scheme and may also look at creating some common ground between its flagship Sukanya Samriddhi Scheme and the PPF scheme.

Towards social security The report expects the Centre to maintain parity in interest rates between the organised sector/EPF and the unorganised/PPF for the larger goal of social security.

Studies conducted by SBI’s economic research department on PPF accounts show that such accounts from urban and metro areas are almost 2.5 times higher than rural and semi-urban accounts. Hence, such accounts may be used more for tax savings.

An analysis of the spending patterns of individuals with investments in PPF showed that those who are in the lowest quintile of income distribution want to invest more by stretching the number of payments in a year.

An exactly opposite trend is evident among people with higher income and spending. Such people tend to invest less over time as their objective is to save on tax.