November 17, 2003	Monday	Ramazan 21, 1424

Retail investors continue to ignore long-term Pakistan Investment Bonds. The State Bank has so far conducted two auctions of the government bonds after allowing retail investors to participate.

Their response has been lukewarm. At the first auction on 4th October 2003, retail institutional investors purchased Rs527 million worth bonds. The SBP had set a target of Rs2.5 billion. At the second auction on 5th November 2003, these investors purchased only Rs167.8 million bonds. The minimum target was Rs1.5 billion.

So in the two auctions combined, retail investors bought about Rs695 million worth bonds, equal to 17 percent of the target set for them. They could have bought up to Rs4 billion bonds. Rules allow them to buy upto 10 percent of the total amount of the bonds offered for sale, and in the last two auctions Rs40 billion bonds were offered for sale.

Meanwhile, corporate investors including banks purchased Rs34.2 billion bonds in the two auctions. The question is why these bonds are not getting good response from retail institutional or individual investors?

INDIVIDUAL INVESTORS: When the government had introduced PIBs in December 2000 it was not clear whether individuals could also buy them. The government had not specifically allowed them to invest in these bonds. But it had not prohibited them either.

These bonds of three-year, five-year and 10-year maturity were issued primarily for institutional investors, who had been stopped from making investment in national saving schemes. They were naturally the first buyers. Then the banks were also allowed to invest in these bonds. The sale of the bonds was entrusted to the primary dealers of the State Bank i.e. the banks selected for selling government securities in the secondary market. It did not occur to the government to sell new bonds to individuals. The primary dealers also did not think of marketing these bonds to individuals chiefly because there was no demand in sight. Individuals continued to invest money in the old, fixed income certificates and accounts of national saving schemes that were then offering higher returns than the newborn bonds.

Besides, the new bonds were scripless-i.e. they did not exist physically and could be traded only electronically after opening an account with any of the six primary dealers. And they were available in the multiples of Rs100, 000. As against this certificates of national saving schemes could be bought, and accounts could be opened, for as little an amount as Rs500. Small wonder then that these bonds were not even known among the majority of individual investors.

When seen in this backdrop, the lack of interest of individual investors in PIBs sounds quite logical. So widespread and well-rooted this lack of interest is, that in the last two auctions individuals have shown no interest in PIBs. Small institutional investors have-but without much enthusiasm.

RETAIL INSTITUTIONAL INVESTORS: All investors other than banks/development finance institutions and non-bank financial institutions fall in the category of retail institutional investors. Rules allow each retail investor to purchase upto Rs10 million PIB of a particular tenure. They are not supposed to make multiple bids. Besides, retail investors are supposed to price their bids on their own, and submit the same to the State Bank, through a primary dealer, one day ahead of auction. And they are bound to accept the weighted average yield on all the three tenures of PIBs.

Unlike individual investors, the majority of whom have very little knowledge of PIBs, institutional investors are not only familiar with these bonds, but some of them have already made investment in the same. The key issue, however, is where the retail bid for PIBs is originating? If these bids are originating from major corporate buyers, who want to invest smaller amounts of money in PIBs under any head, then the actual purpose of allowing retail investment in PIBs is not accomplished. The purpose for allowing retail investors to buy PIBs is to develop a big secondary market for them involving as many investors as possible. The bidding pattern seen in the last two auctions suggest that really small institutions have not still developed an interest in PIBs. The so-called retail buyers of roughly Rs695 million bonds include many big, old institutional investors. So, what can be done to make PIBs popular with small institutions?

INDIAN EXAMPLE: One of the things Pakistan can do is to follow the Indian example in marketing these bonds. In January 2002 India allowed sale of its government security paper to retail investors not only through primary dealers but through all banks. Pakistan can also involve all banks in marketing of PIBs among retail investors. Some senior SBP officials say this sounds practical. But they say the State Bank will first watch the bidding pattern for PIBs in a couple of more auctions before making such a move. The number of primary dealers in Pakistan is 11 whereas there are 40 commercial banks operating in the country. If all of them are allowed to sell PIBs to retail investors, this can attract many such investors.

CLASH OF INTEREST: But not all banks would like to market PIBs on a large scale, using their own branches, because they can end up losing some of their depositors. Or at least, it will make fresh deposit mobilization more difficult for them. The yields on PIBs are much higher than the rates of return on bank deposits of similar maturity, and may always remain so, because banks themselves invest in PIBs. Naturally then, they cannot offer to their depositors a rate of return equal to the yields on PIBs of similar maturity. Besides, aggressive marketing of PIBs among retail investors will need extra staff hiring, which does not seem practical for two reasons.

First, five major local banks, with large networks of branches needed for marketing PIBs, are already over-staffed or have just reached the right employee-to-branch ratio. And second, smaller local and foreign banks are busy developing new products, both for deposit raising and credit marketing. If they go for hiring additional staff, they will do so for marketing of their own products, and not for anything else.

PUBLICITY: The government can make PIBs popular with retail investors through a targetted media campaign. Prospective buyers of PIBs are colleges and universities, hospitals, NGOs, small business houses and factories etc., both in rural as well as urban areas. Senior bankers say the government should launch a media campaign aimed at creating awareness about PIBs among these establishments. They say it is right time for marketing PIBs among retail investors because frequent rate cuts on national saving schemes have forced people to withdraw investment from these schemes. In July/August 2003, there has been an outflow of Rs2 billion from NSS though an equal investment has been made into pensioners’ accounts and Behbood (welfare) saving certificates for widows. (The reason is these 10-year, tailor-made schemes carry 10.08 percent annual return against 8.5 percent on 10-year defence saving certificates). Since the pensioners’ accounts do not cover retired employees of private companies, PIBs can be first marketed among them. But if the government wants to attract such and other retail investors and make PIBs more popular, it will have to allow all banks to sell them to small investors. Only 11 primary dealers cannot do this. They should better focus on corporate marketing of these bonds.

COMMITMENT WITH IMF: There is a huge scope for PIBs marketing among retail investors after the government’s commitment with the IMF to bring the rates of return on NSS and PIBs almost at par. It is a separate issue, however, that the government should have resisted the IMF demand in the first place. Or at least it should now come up with a third tailor-made national saving scheme for retired employees of private companies. Under an agreement with the IMF, the government will have to bring the rate of return on all instruments of NSS, minus pensioners’ accounts and Behbood saving certificates, almost at par with the PIBs of similar maturity by June next year. The government can easily launch a third tailor-made scheme for elderly citizens and retired employees of private companies before June 2004. Senior foreign bankers say that the IMF may have little objection, if the government introduces such a scheme with a cap on investment in the same to discourage interest rate arbitrage.