May 31, 2003	Saturday	Rabi-ul-Awwal 28, 1424

KARACHI, May 30: Some banks are encouraging their customers to borrow up to 90 per cent for purchase of Special Saving Certificates (SSCs) at rates ranging from 4.75-5.5 per cent per annum in order to pledge the SSCs as security against loans, sources here said. The yield on SSCs is 8.5 per cent, valid up to July 1, 2003.

“These loans are good for both the customers and their lending banks but bad for the government,” reckon financial analysts and add:

“Customers earn a cool spread of 3-3.75 per cent per annum. Banks reduce their worries by channelling surplus liquidity to the government and book quality loans secured by liquid assets to the extent of 111 per cent, by lending up to 90 per cent for buying SCC.”

Yet another analyst said that though not all lenders may make a profit on such deals, depending on their intermediation costs, the real loser is the government. As more and more SSCs are sold, the government’s debt cost keeps on climbing whereas the policy-makers feel happy that by lowering T- Bill rates to below two per cent, government’s borrowing costs has been cut.” These banks are licking the government from the back door,” he added.

Sources here said that the State Bank has received complaints of banks lending money for buying SCCs and was looking into the problem. It has been widely acknowledged that individuals have been borrowing at interest rates at historically very low levels to buy SSCs. But it has been seen as individual initiative. Now, some banks are encouraging this trend by providing finance for purchase of SSCs because of excess liquidity and falling interest rates. And there is strong anecdotal evidence to support the new trend. “It is time that the SBP sought statistics from all banks for such loans and took steps to reverse this trend,” says a banker who would like credit to flow into productive channels.

To end this practice, financial analysts suggest that difference between interest rates and return on NSS should be reduced or alternatively the banks should be stopped from lending against SSCs. The latter course is, however, seen as quite harsh by some bankers.

According to official figures available here, the outstanding stock of SSC on March 31, 2003 was to the tune of Rs250 billion against Rs209 billion on June 30, 2002, an increase of Rs41 billion. Since the outstanding stock is arrived at after encashment of certificates, the actual sales may be much higher. It may be added here that institutional buyers are no longer allowed to buy SCCs and they encash their certificates on their maturity. This figure was not immediately available.

The outstanding stocks of National Saving Scheme (NSS) certificates stood on March 31, 2003 at Rs917 billion (inclusive prize bonds) against Rs846.6 billion on June 30, 2002. As the average return on bank deposits (3 per cent) has fallen below the inflation rate (3.5-4 per cent), the NSS has emerged as the most attractive avenue for fixed incomes and for many with no other source of livelihood.

There is some expectation that sales of SSCs are likely to shoot up by June 30, 2003.