The government introduced the five-year pensioners' savings certificates on Thursday with a plan to curb interest rate on the existing savings certificates.

The government has reduced the interest rate on savings instruments several times and also closed several savings instruments in its bid to reduce interest burden as well as pave the way for the development of a sound bond market.

Under the new scheme, certificates will be available in four denominated categories --Tk 1 lakh, Tk 2 lakh, Tk 5 lakh and Tk 10 lakh -- bearing 11 percent interest. A pensioner will be allowed to invest a maximum of Tk 20 lakh.

Certificate holders will also be able to encash the instruments with partial interest before the maturity period of five years. In the event of encashment before maturity, a certificate holder will receive 7.5 percent interest in the first year, 8.25 percent in the second year, 9 percent after three years and 9.75 percent after four years.

Any pensioner willing to subscribe to the savings instruments will require a reference letter from his/her previous employer.

National Savings Directorate (NSD) has already distributed the forms among the offices concerned including banks and post offices.

Currently, the government has two lucrative savings instruments-- the 5-year Bangladesh Sanchaya Patra offering 11 percent interest and 3-year Savings Certificate offering 10.50 percent interest every 3 months.

The interest rate on these two savings instruments was reduced in January. Following the move, sale of these instruments was on the decline.

However, the government is contemplating further slashing interest rate in order to turn it into market-based rate from this month in line with a suggestion of the International Monetary Fund (IMF), sources said.

The postal savings now offer 12.5 percent interest rate. The government is also planing to reduce the interest rate by about 2.5 percent, sources said.

Although the government took these initiatives in line with conditions of Poverty Reduction Growth Facilities (PRGF) loan of IMF, the finance ministry sources however said the move has been initiated to reduce the interest burden of domestic loans.

Government officials said they are still in a dilemma to reduce interest rate on savings instruments as the savings instruments are very popular among general public and at the same time there is a heavy burden on government in paying interest against these instruments.

Another key reason for reducing the interest rate is the very fact that commercial banks are forced to offer high rate of return on deposit to attract depositors which in turn forces them to charge high interest on lending which makes business expensive, the government officials said.

In July-April of the last fiscal year of 2003-2004, the sale volume of the savings certificates stood at Tk 8,121.93 crore marking a three-percent rise over corresponding period of previous year. After April 2004, the total outstanding amount of the savings instruments stood at Tk 33050.28 crore, which was Tk 29582.86 crore in 2002-2003 and Tk 13059.74 crore in 1998-1999.