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KARACHI, Sept 5: Investment in National Saving Schemes rose to Rs108 billion in the fiscal July-June 2002-03, up from about Rs71 billion in 2001-02. But a big chunk of this Rs37 billion increase in NSS did not cheer up the government — it rather caused concern.
Bankers say Rs22 billion investment was made in NSS by those who got loans from banks to buy Defence Saving Certificates and Special Saving Certificates — and then used them as collateral to secure more loans. This benefited such investors — most of them top corporate clients of banks — as they were getting loans at 4-6 per cent and were earning 10 per cent and 8.6 per cent profit on the DSCs and SSCs, respectively. Thus they were making an extra 2-4 per cent profit through this activity. The arrangement suited the banks as well because it enabled them to make loans to the prime borrowers against zero-risk collaterals fully guaranteed by the government.
But the government itself was net loser because this peculiar type of over-investment was unnecessarily increasing its cost of domestic borrowing. In fact the government did not need to borrow excessively through NSS because raising loans through treasury bills had become much cheaper — thanks to frequent falls in its yield. In the last fiscal year the yield on benchmark six- month T-bills fell 4.63 percentage points — from 6.28 per cent to 1.65 per cent.
Monthly break-up of Rs108 billion investment in NSS updated on the SBP website supports the view that NSS attracted higher investment in 2002-03 mainly due to DSCs/SSCs buying by those who used them as collateral for bank loans. Investment in DSCs and SSCs rose sharply in April-June 2003 — and this was exactly the period when banks were busy making huge loans against DSCs/SSCs to employ their surplus liquidity profitably. During this period investment in DSCs and SSCs totalled more than Rs50 billion, up sharply from about Rs16.5 billion in the preceding quarter.
FUTURE OUTLOOK: The government had realized the seriousness of the problem arising out of over-investment in NSS by corporates in connivance of banks. So in mid-June it asked bank branches to suspend selling DSCs and SSCs. Had this not been done the total investment in NSS would have been even higher than Rs108 billion in the last fiscal year.
The government not only stopped the sale of DSCs/SSCs by bank branches, but also refrained them from rolling over those loans that were made against these certificates. This means that the borrowers who had got loans against DSCs/SSCs would have to liquidate these DSCs/SSCs and pay off their bank liabilities — or offer fresh collaterals if they want to keep the borrowing facility running.
“If borrowers liquidate their saving certificates this would reduce the stock of government borrowing from non-bank sources,” said a seasoned banker. “But on the other hand the government would most likely to raise fresh loans from banking system at cheaper rates,” he said explaining that the cost of borrowing through NSS is much higher than through treasury bills or PIBs.
IMF CONCERN: In the meantime the central bank is trying to remove the distortions in the interest rates structure and made it more market-based. The fact that corporate borrowers were tempted to secure cheaper bank loans against DSCs/SSCs and earn an extra 2-4 per cent profit shows that NSS rates were not being kept in line with the market rates. An IMF staff report posted on its website shows the Fund is concerned about the interest rate structure on NSS.
The IMF regards the difference between the rates of return on NSS and the return on bank deposits of same maturity as a subsidy to those who invest in national saving schemes. This “reflects the government intention to promote private saving and give support to pensioners and others who rely on income from NSS saving.” The report further says that since the very poor do not command sufficient resources to invest in NSS the implicit subsidy “does not appear targeted to those most in need of the government assistance.” The report says that “any subsidy for a particular group should be well targeted and explicit.” That was why the government announced Bahbood Saving Certificates for widows in the budget 2003-04. Under this scheme widows would get 10.08 per cent return — exactly what the pensioners get on a tailor-made scheme for them under NSS.
That the rates of return on long-term bank deposits are much lower than the rates of return on NSS is an open secret. Most banks are paying between 2.25-5.0 per cent return on five-year deposits, whereas the return on five-year RIC or Regular Income Certificates still stands at 7.68 per cent: Before July 1, 2003, it was 9.12 per cent.
WHAT TO DO: Bankers say the spread between the rates of return on bank deposits and the rates of return on NSS could be brought in line once the coupon rates on Pakistan Investment Bonds are lowered and the State Bank sets realistic auction targets for the same. The coupon rates on three-year, five-year and 10-year PIBs are 7pc, 8pc and 9pc, respectively, but their effective yields are much lower. Word is out that the government may cut coupon rates on these bonds before introducing 15-year bonds to give a longer term yield curve to the market.
Bare are anticipating one percentage point cut in the coupon rates of PIBs, but so far no official indication has come to this effect. The next auction of the bonds is due this month and the State Bank is to give a 15-day notice to the banks first. Bankers say the SBP should better consult primary dealers before setting a sale target for PIBs. “Because in the past we have seen very unrealistic targets that eventually leads to distortions in the interest rates structure,” said a local banker. He was obviously referring to Rs30 billion target set for PIBs auction in June seemingly aimed at keeping the yields from falling too low before revision of NSS rates in July.
