Financial Daily
from THE HINDU group of publications

Tuesday, July 17, 2001



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UTI and interest rate reductions

R. Y. Narayanan

THE US-64 imbroglio and the so-called support for `small investors' across the political spectrum have raised doubts over the planned revamping of the pension system and interest rate structure for small savings.

In addition, there is the view that without dependable alternatives for the `small investors', the Government must weigh more carefully the consequences of the frequent slashing of interest rates on savings instruments, particularly of small savings.

This assumes significance since every political bigwig -- from the Finance Minister, Mr Yashwant Sinha, to the leader of the Opposition, Ms Sonia Gandhi -- have rallied behind this investor class, whose interests they want to safeguard.

Ironically, when small savings interest rates were cut in the last two years, there were voluble protests over the way the Government's decisions would affect the small investor.

In fact, even the UTI's controversial decision to terminate the Rajalakshmi Unit Schemer-92 (RUS-92) last year did not merit any intervention by the Centre despite the fact that it was a scheme for the exclusive benefit of women.

The UTI had stated then that the promise of an implicit return of 16.16-16.75 per cent was based on estimated returns available from capital market instruments. But under the changing economic scenario, such an implicit return could not be maintained and hence the decision to terminate the scheme, the UTI had stated.

Apparently, the continuous softening of the interest rates had affected the US-64 scheme too, which had a substantial debt exposure. Since top-rated corporates could access loans at a lower rate, the UTI too would have to offer competitive rates if there were to be takers for its loans. Yields from its investments in the debt market too should have declined.

The import of these developments was clear when the UTI recently slashed its interest rate for the long-running MIP to just 5 per cent, which is lower than the inflation rate. Even for the MIP launched on January 8, the rate of income distribution in the first year was only 9.75 per cent.

Viewed in this backdrop, it was likely that the UTI was a victim of its own investment decisions, if any, in shares that had witnessed a prolonged hammering since February 2000. And, even the debt market was not giving it much elbowroom.

It is not clear how North Block mandarins failed to anticipate the impact on the UTI of the falling interest rates on savings instruments, which they themselves had authored. The writing on the wall was clear even two years ago when the systematic reduct ion in bank and small savings interest rates was set in motion.

In such a scenario, what would happen to Project Oasis? Will the promised changes in the pension schemes and entry of the private mutual funds in pension business materialise? These are important concerns because the expert committee headed by the IRDA C hairman, Mr N. Rangachary, is expected to present its report by this month-end so that the road map on pension reforms can be finalised by the year end.

According to reports, even the UTI staff will be feel the pinch of the US-64 meltdown as their own PF contributions are invested in the scheme. Even the employees of the PF Department will be watching with trepidation the softening of interest rates sinc e their contributions too are invested in designated instruments as in case of EPF contribution. In the long run, their yields could also fall.

So, what will be the fallout of the US-64 imbroglio? If a scheme managed by an institution in which the Centre has a major stake, and has public financial institution chiefs as trustees, falters frequently, what about others? Can the hard-earned savings of the `small investors' allowed to be eroded?

The Centre should seriously think about promoting alternative savings instruments in lieu of small savings. This will serve the long-term needs of the people whose welfare it swears by. However, if narrow considerations, such as bringing down its own int erest burden, were accorded primacy in taking crucial decisions, then the small investors may have a long grind ahead.

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