KARACHI, June 16: Bank branches can no longer sell defence saving certificates and special saving certificates. Senior bankers say a notification issued by Finance Division of the federal government has suspended indefinitely sale of these certificates through bank branches. The notification does not cite any reason for this action.

But bankers say this would discourage the banks involved in selling these certificates to their customers out of the loans given to them and persuading them to use them as collateral for re-securing low-cost fresh loans.

This practice was benefiting the banks and their borrowers but was adding to the cost of government borrowing through these certificates.

“The federal government has decided to suspend the sale of defence saving certificates (DSCs) and special saving certificates (SSCs) through the outlets of all the scheduled commercial banks w.e.f. June 15 — till further orders,” reads the notification.

But it says that the bank branches may continue to pay the profits on the certificates already issued by them besides providing encashment facility.

The issuance of the notification shows that the government is getting more and more serious about keeping its cost of both local as well as foreign cost of borrowing within limits. On the one hand the government has started identifying such foreign loans that were raised on high rates to retire them before time. And on the other by discouraging banks from over-selling saving certificates to their customers the government is trying to make sure that the saving certificates attract genuine long-term investors rather than becoming a tool in the hands of the banks to make money.

Banks wallowing in excess liquidity were giving loans to their customers at low rates to buy these certificates — and then pledge the same to get fresh loans — again at low rates. Since the return on these certificates are much higher than the rates at which the customers were getting loans from their banks they were earning handsome profits through this activity. On the other hand it was helping banks use excess liquidity in lending to first class borrowers against zero-risk DSCs and SSCs fully guaranteed by the government.

UAE: The notification says the sale of DSCs and SSCs through authorized bank branches operating in the UAE i.e. Habib Bank/ United Bank shall continue as per existing arrangement “for the convenience of overseas Pakistanis.” The government had allowed the two banks sell saving certificates in the UAE to attract rupee investment from expat Pakistanis living in that region.

But the notification makes it clear that the saving certificates thus sold in the UAE cannot be used overseas as collateral against bank loan or facility. “Such facility up to Rs1 million shall, however, remain available in Pakistan,” it says implying that overseas Pakistanis who buy DSCs and SSCs in the UAE may use them in Pakistan as collateral for raising loans up to Rs1 million. But the notification says such people will have to get prior clearance from central directorate of national savings.

The notification has warned all banks and other financial institutions that any fresh sale of DSCs and SSCs by bank branches after June 15 would be considered without authority.