Kisan Vikas Patra: a re-launch with very few justifications

Despite some criticism and misgivings in certain
quarters, the government has decided to re-
introduce the Kisan Vikas Patra (KVP), a savings
instrument that was discontinued three years ago.
Positioned as a savings instrument in line with
other continuing ‘small savings schemes’ such as
the Public Provident Fund (PPF) and the National
Savings Certificates (NSCs), the new KVP, like its
predecessor, has certain advantages as well as
disadvantages over these. Most ordinary investors
will compare the new KVP with bank deposits and
other debt instruments.

Broad features of the new KVP

* Interest: 8.7 per cent.
* Tenure: eight years and four months (100
months).
* Investment doubles in 100 months.
* Minimum lock-in period two years and six
months.

Liquidity

* Can be encashed in eight equal monthly
instalments after the lock-in period
* Can be transferred to another person by
endorsement and delivery
* Can also be given as collateral for loans by banks
* Minimum investment Rs.1,000. Thereafter, in
denominations of Rs.5,000, Rs.10,000 and
Rs.50,000. There is no maximum limit.
* Taxability: fully taxable
* Mode of investment: cash or cheque
* Know your customer (KYC) norms: PAN not
required but identity/address proof required
* Will be sold initially through post offices across
the country, but later through some government-
owned banks also

How does the new KVP fare

Any investment proposition needs to be evaluated
in terms of certain well-defined parameters. These
include safety, security, yield or return, liquidity,
accessibility, convenience and tax advantage.
These parameters are relevant for any investment
proposition whether debt or equity.

For the convenience sake, the re-launched KVP can
be compared on the one hand with the existing
savings instruments, and with bank deposits on the
other. In comparison to its previous version, the
new KVP offers a 0.5 percentage point higher yield
(8.7 versus 8.2). Investment under the old KVP
doubled in eight years and seven months. In the
new KVP, the doubling takes place in eight years
and four months.

A comparison with a discontinued scheme is not
particularly useful. In relation to the existing
savings schemes, the yield on the new KVP is on a
par with the PPF and the NSCs. It is equally safe.
The government would make it more easily
available and also educate customers. Accessibility
to the KVP should not be a problem.

Comparing with bank deposits

Taking three other relevant traits — liquidity,
convenience and tax advantage — the new KVP is
reasonably liquid. Investors can come out after the
minimum lock-in period in eight equal instalments.
The KVP can also be given as collateral. Unlike PPF
and NSCs, the KVP does not have a tax advantage.
Interest on it is fully taxable.

Bank deposits are superior to KVP in terms of
returns — three year fixed deposits offer 9 per cent
and some banks even more. The argument that
deposit rates are set to fall over the medium-term
is no doubt valid, but one expects the banks to
safeguard their depositors’ concerns by floating
innovative schemes. It is also certain that the
corporate bond market will revive and be a
conduit for infrastructure finance. This will matter
to senior citizens and others who want a fixed,
steady return in the form of investment in
infrastructure bonds. Bank deposits are liquid,
absolutely secure and highly accessible to most
middle-class investors. They have a minimum tax
advantage — practically restricted to interest on
savings accounts.

For those who have no access to banks, investment
in KVP may be a worthwhile proposition. Having
no tax concessions, the KVP as in investment is for
those who do not pay taxes at all or are in the
lower tax bracket.

The biggest advantage claimed for the KVP —
indeed its USP — is that it is a bearer bond,
transferable by endorsement and delivery. This
confers unmatched anonymity to the holder of the
instrument.

Policy perspective

But that precisely is its main drawback from a
policy perspective. The earlier version was
discontinued because it was suspected of being a
conduit for laundering black money.

In the new KVP too, there is very little compliance
of KYC norms that are routinely applied by banks,
mutual funds and the like. In fact, it is the
conviction that the onerous KYC norms are driving
away bank customers at a time when household
financial savings have dipped seriously, that seems
to have prompted the government to re-launch a
new instrument with very few entry barriers, The
Finance Minister has clarified that certain
precautions will be taken for large investments in
KVPs.

How that reflects on the new KVP’s success in
terms of collections remains to be seen. Whatever
way one looks the KVP has very few justifications
beyond the obvious — mobilising funds by the
government at all costs.

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