ISLAMABAD: Though the National Savings Schemes (NSS) play an important role in mobilising retail savings, a report of the finance ministry has recommended that the rate of profit on the schemes should be more dynamic and closely aligned to the domestic market yield curve to avoid interest rate arbitrage.

This advice to the government is in the wake of three downward revisions in the profit rates on the schemes in 2013.

The Central Directorate of National Savings (CDNS) reviews rate of profit after every three months. Effective January 1, 2014, the CDNS has increased the rate of profit on all its eight schemes.

The NSS instruments also need to be integrated into mainstream capital market by making them tradable and by withdrawing the implicit put option, which is a potential source of liquidity problems for the government, according to the latest statement on debt policy for 2013-14.

The CDNS is offering various schemes which met the savings and investment needs of various eligible investors, particularly the fixed income group.

The finance ministry report recommended restructuring of the CDNS with development of capacity building and conversion into vibrant customer centric distribution channel for the government debt instruments, and complete automation operation with a view to make the saving schemes more dynamic and closely aligned to the domestic market.

Given the huge potential of mobilising domestic savings, a restructured and well-equipped CDNS would be strategically used to promote outreach of financial services to remote areas, emphasizes the report.

Over the past few years, the government took various measures to rationalise the national saving schemes including linkage of profit rates on major schemes with the yields of Pakistan Investment Bonds, levy of withholding tax on profit, service charges, penalty interest on early redemption and introduction of several new schemes to meet the diverse investor base demand.