No takers for small savings scheme

The National Small Savings Fund (NSSF), which used to be a major avenue for people to park money, is losing out to banks, mutual funds and insurance companies. The NSSF's net collections in 2007-08 will decline 68 per cent over the previous year.

The revised estimate of net collections from small saving instruments in 2007-08 shows that the NSSF will garner Rs 18,000 crore (Rs 180 billion) compared with Rs 57,500 crore (Rs 575 billion) in 2006-07.

Net NSSF collections in 2004-05 were 96,788 crore (Rs 967.88 billion). The estimate for 2008-09 is Rs 30,000 crore (Rs 300 billion).

Further, the NSSF is expected to take a hit of Rs 765 crore (Rs 7.65 billion) and Rs 1,450 crore (Rs 14.5 billion) in interest income in 2007-08 and 2008-09, respectively, on account of resetting of interest rates for loans given to states between 1999-2000 and 2001-02. The rates were reset at 10.5 per cent from 13.5 per cent.

The pre-payment of loans to the NSSF by Tamil Nadu, Orissa and Delhi will also hit the fund's interest income in coming years.

With states' own tax revenue growing and other options for raising cheaper funds available, many states are borrowing 80

per cent of the small savings collections from other states.

In order to deploy the surplus, the NSSF plans to lend Rs 1,500 crore (Rs 15 billion) each in 2007-08 and 2008-09 to India Infrastructure Finance Company Ltd at 9 per cent interest. This is 50 basis points lower than what it charges from states.

The return from the NSSF instruments is between 6 per cent and 9 per cent, while mutual funds have been giving about 25 per cent annual return for the last few years. Banks and insurance companies have also given higher returns than the NSSF in the last few years.

To save the fund from collapsing, the finance ministry included five-year Post Office Time Deposits and Senior Citizens' Saving Scheme under Section 80C for tax exemption.

A bonus of 5 per cent was also announced on Post Office Monthly Income Scheme. Earlier, only public provident fund investments and national small saving certificates used to be exempt under Section 80C.