According to the KVP notification, a payment by a depositor can be made in cash or cheque, meaning the person’s identity proof will be recorded but the source of the payment, if made in cash, might be difficult to trace, notes Arup Roychoudhury.
A day after its relaunch, the Kisan Vikas Patra on Wednesday drew concerns over know-your-customer requirements, which were not clearly stated in the government’s official press release or the September 23 notification on the scheme.
The fear was that the scheme might be used for routing unaccounted money back into system.
Officials in the finance ministry, however, maintained that the Reserve Bank of India’s KYC norms for national savings schemes were applicable to post offices and banks since January 2012, so those would be applicable to the Kisan Vikas Patra as well.
They also said they expected to rake in at least Rs 35,000 crore (Rs 350 billion) through the scheme in 2015-16.
According to the KVP notification, a payment by a depositor can be made in cash or cheque, meaning the person’s identity proof will be recorded but the source of the payment, if made in cash, might be difficult to trace.
Leading the criticism of the scheme’s new avatar was former finance minister, P Chidambaram.
“The government’s ostensible purpose in relaunching the Kisan Vikas Patra is to promote savings.
"The argument seems suspect, as there are other fixed-income instruments that offer better returns,” Chidambaram said.
He added the government needed to clarify whether the payments were to be made by cash or cheque/bank drafts, and whether quoting the permanent account number (PAN) would be required or dispensed with.
“What are the KYC norms, if any, that will be applicable to an investment made in KVP?
"And, will a KVP be freely transferable, without any limit on the number of transfers? If so, what is the use of applying KYC to the first purchaser,” Chidambaram asked.
Deputy leader of Opposition in the Rajya Sabha and former Union minister, Anand Sharma, described the KVP relaunch as “a questionable move”. He said: “KVP is an instrument that was earlier withdrawn because of serious concerns raised by tax authorities.
It was being used as an instrument to recycle black money. What is the need to relaunch it? It is for the present government to explain how they have addressed the concerns, particularly on recycling of black money.”
Rajeev Gowda, formerly professor of the Indian Institute of Management, Bangalore, and a Rajya Sabha member, said: "Questions can be raised about the sincerity of the government in tracking down black money when they introduce instruments that can be misused to launder black money."
Gowda added: "On the face of it, KVP appears to be targeted at those in the rural areas who do not have enough investment options.
"But in its current avatar, it is open to everyone. In an era of KYC norms, if you introduce an instrument that does not require one to disclose where one got the money from, it will be seen as invitation to black money."
At the re-launch of KVP on Tuesday, Finance Minister Arun Jaitley had said, in the first phase of the scheme, the certificates would be bearer instruments, without the holder's name.
But government officials sounded confident stricter KYC norms would ensure the scheme was not used to route black money into the system. They also said the certificates would be registered instruments.
"The papers will carry the names of the holders, and their identity proof and residence proof will be recorded in the post office register," said a finance ministry official.
The official said, as part of KYC requirements, apart from identity proof, a deposit of Rs 50,000 and above will require the holder to furnish his or her PAN details; and a deposit above Rs 10 lakh (Rs 1 million) would require him or her to additionally give the proof of the source of income.
KVP, originally launched in 1988, was disbanded in November 2011, despite being a very popular small savings scheme, with gross collections of Rs 21,631.16 crore in 2009-10.
The scheme was disbanded on the recommendation of the Shyamala Gopinath committee on comprehensive review of national small savings fund, over concerns KVP might be used to get black money into the system.
"The committee is of the view that KVP may be discontinued as it is prone to misuse, being a bearer-like instrument," the report had said.
"That was 2010-11. This is 2014-15. In these four years, KYC norms have only become stricter. Our hope is that these norms will deter people trying to route black money through the scheme," said the official.
The view was echoed by some personal finance experts.
"I do not see the KYC concerns as an issue. Currently, even post offices ask for your identity and address proof," said Vineet Arora, head of product & distribution at ICICI Securities.
But Arora pointed out that KVP offered a lower rate of returns than some other savings schemes that also gave incentives like tax breaks (interest earned on KVP is fully taxable).
Government officials agreed there were better schemes but added those were for people with taxable income and access to bank accounts.
KVP, on the contrary, was aimed primarily at people in the lowest income groups who were uneducated and without access to banks, they said.
These people lost their money by investing in Ponzi schemes and fly-by-night cons promising 'unrealistic' returns, the officials claimed.
The finance ministry and the department of posts is planning a huge information and advertising campaign, with a budget of more than Rs 1.5 crore, officials said.
"You may not see money being spent on buying advertising space in big cities like Delhi or Mumbai. But there will be a lot of that in villages, once the campaign starts." The finance ministry had roped in public broadcaster Doordarshan to spread information on KVP, they said.
A LOOK AT THE SCHEME
- Critics point to KVP’s closure three years ago, say scheme can be used to launder black money
- Analysts say investors should go for other schemes with tax sops, better returns
- KVP notification says payments can be made in cheque or cash; latter’s source harder to track
- FinMin says stronger KYC norms will dissuade people from putting in black money
- FinMin says post offices will need identity, address proof
- The ministry also says KYC norms for national savings schemes applicable for KVP
- FinMin sees Rs 35,000 cr (Rs 350 billion) of deposits from KVP in FY16