Returns on PPF, NSC May be Lowered after RBI move

The government may be forced to lower interest rate on small savings schemes such as Public Provident Fund and NSC when it reviews them at the end of the month as they are not in sync with the market, and is forcing banks to cough up more on deposits, repors The Economic Times.
With the RBI on Wednesday ordering banks to price retail and MSME loans in line with external benchmarks such as repo or treasury bills, net interest margins are going to come under pressure in the coming quarters as banks will not be able to significantly cut rates on deposits, while making new loans cheaper. While some banks such as SBI had linked their savings bank deposits to the repo rate, the change was only temporary. Others like IDBI Bank have linked certain bulk deposits to repo rate. 
“It is not feasible to link deposits to repo rate in a falling rate situation. Plus, we will lose deposits to small savings schemes,” said a public sector bank chief. SBI MD P K Gupta said the bank will soon take a call on the issue. 
A senior government official acknowledged the concern and suggested that there was a need to lower small savings rate, which is a political call and would be a difficult decision at a time when the Narendra Modi administration is already under attack from the opposition for the current economic situation. At the same time, the official said, banks can partly address the concern by improving their efficiency. 
Although the finance ministry had agreed to move to a market-linked regime for small savings schemes, it itself is guilty of holding back transmission of rates on PPF or Kisan Vikas Patras, fearing adverse public opinion.



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