The Central Bank is now busy preparing the necessary operative instruction to the banks to implement a 20% bonus interest scheme for senior citizens hard hit by the recent interest rate reduction, Governor Ajith Nivard Cabraal said yesterday.

This scheme, announced last week by President Mahinda Rajapaksa at a meeting with the Organization of Professional Associations, will be limited to a possible maximum of Rs. 90,000 per year and will be effective from January, he said.

"We haven’t yet decided what the cap on payments will be but Rs. 90,000 is the figure that is being looked at," Cabraal said. "The Treasury Bill rate floor at which the scheme will kick off has also not yet been finally decided."

People above the age of 60-years will be entitled to the bonus interest on savings deposited in the banks.

In his speech to the OPA, the president acknowledged that while the decrease in interest rates is welcomed by entrepreneurs and businessmen, this was not the case where savers, especially senior citizen were concerned.

``Consequently, many senior citizens have appealed to us to intervene in this regard. As a leader who is sensitive to the issues confronting our people, we do see some merit in this request,’’ the president said.

``Therefore, we have decided to respond by developing a scheme whereby the Government will pay a bonus interest of 20% of the interest paid by banks on deposits of senior citizens, to be effective from January 2010.

``This would mean that a senior citizen who receives interest on a deposit with a bank, will receive an additional one-fifth of such interest from the Government as a special support, so long as Treasury bill interest rates are lower than a certain specified level.’’

Earlier this year, the government paid a 20% rupee bonus on interest earned on Non Resident and Resident Foreign Currency (NRFC and RFC) accounts in accordance with an announcement in the last budget. Payments began in February but ended in September when the country’s foreign reserve position became comfortable and there was no need to offer incentives for foreign exchange savings.

In his OPA speech, President Rajap.aksa also admitted that older people who have ``diligently saved for their retirement,’’ have been hard hit by the fall in interest rates saying they ``will be able to enjoy a higher income, when interest rates decline sharply.’’

Asked what the scheme will cost, Cabraal said it was not possible to estimate a figure in the context of variables including the TB rate at which the bonus interest will kick off and the exact figure at which such interest will be capped.

The scheme will however not apply to deposits with finance companies which pay much better interest rates than the banks. However, risk averse savers opted for the safety of banks paying lower interest with many finance companies seeing their deposit bases eroded by a shift of savings deposits particularly to the National Savings Bank after the Golden Key and other sensational finance company failures.