During 2002-03, investment in the National Savings Schemes (NSS) rose by a staggering Rs108 billion compared to Rs71 billion in 2001-02. It effectively meant a 52 per cent rise in investment in public sector debt represented by the NSS. Interestingly enough, the bulk of this increase took place in the last six months of 2002-03.

The miracle was not the result of ordinary people’s savings going up dramatically; it resulted from a jugular act performed jointly by the rich and mighty, and some unscrupulous bankers while the bewildered ordinary people watched from the sidelines.

According to a recent press report (September 16), of the Rs108 billion rise in outstanding NSS securities during 2002-03, nearly Rs30 billion was contributed by a handful of businessmen that include “textile and beverage tycoons, a leading leather garment exporter and some Karachi and Lahore-based stockbrokers” who borrowed just about Rs27 billion from banks at markup rates between 4 to 5 per cent per annum for investing the funds in the NSS securities that will yield 8.5 to 9 per annum for the next three years.

According to this press report (not contradicted yet either by the directorate of NSS, the banking sector, or the Central Bank) the three dozen or so businessmen and their bankers, who performed this miracle, will get Rs225 million every month from the exchequer, which translates to Rs8.1 billion over a three-year period. It is worrying that in spite of so many pointed details being reported in the press, no visible punitive action has been taken against either these make-believe “borrowers” or their lending banks. Nor has any action been taken against the agencies whose lack of monitoring led to fleecing of the government by this cleverly disguised scam.

Those who must initiate the punitive action have not yet realized that this scam reflects the combined failure of several state institutions. These institutions failed to notice the rapid rise in public debt being booked through sale of the NSS securities as well as the abnormal rise in bank loans secured by the NSS securities. This was primarily a case of poor in-house monitoring by the directorate of the NSS. The “lapse” of directorate in failing to note the sudden rise in the NSS security sales, is extremely hard to digest, more so because there are many who assert that the abnormal rise in the NSS security sales was pointed out to the directorate and the ministry of finance, well before June 2003.

In the last week of June this year, at a workshop organized by NAB’s Karachi directorate, I had voiced the apprehension that banks were offering their customers cheap loan packages whereby, with only a 10 per cent customer-stake, the loan amount was being invested in the NSS securities allowing clever banks and their greedy customers to profit at the expense of the state. Later, I requested this newspaper to highlight this scam. Then only did the functionaries in the ministry of finance admit that the scam was adding to public debt servicing cost from the back door, while they were rejoicing at having cut this cost by lowering the yields on T-Bills and Pakistan Investment Bonds (PIBs).

Secondly, this activity also went unnoticed by the Public Debt Office that is responsible for reporting not just the trend of public debt but on the rising or falling cost of public debt as well. It is amazing that they couldn’t notice such a major shift in the portfolio of public debt. Last but not the least, the trend was not noticed by central bank supervisors who are required to monitor not only the volume and pace of credit expansion but also the asset-types securing bank credit, and the end-use of the borrowed funds.

This state of affairs points to an almost baffling lack of coordination between various agencies of the State, of which the benefit was taken by profit-hungry commercial banks and their unscrupulous customers through a seemingly fair loan marketing campaign. At the NAB workshop, I had pointed a finger at this dubious loan marketing campaign because it had come to my knowledge that some banks had gone to the extent of conducting training courses for their employees to market these “Instant Consumer Loans”. The truth is that through this well-organized scam, banks struck back at the country’s monetary managers for lowering the yields on T-Bills and PIBs to wholly unrealistic levels. Starved for the lucrative returns they had got so used to over the years, they found ingenious ways of hitting back at the monetary managers.

Banks used novel techniques to hide the transactions involving temporary inward foreign remittances to finance the purchase of NSS securities by structuring them ingeniously. Initially it was shown that a foreign inward remittance was received in the name of the customer the proceeds of which were used to buy DSCs and immediately thereafter the customer sought a loan for an amount up to 90 per cent of the value of the directorates by pledging them as security but the fact that the loan proceeds were swiftly remitted back to the sender of the inward remittance through a money changer, was cleverly covered up.

In such cases, what needed to be investigated by the central bank supervisors were answers to questions such as who was the sender of the foreign remittance, what relationship did the bank’s loan obtaining customer have with the sender of the foreign remittance, and finally what did the loan obtaining customer do with the loan proceeds. The press report referred to above, also makes the amazing disclosure that a foreign bank extended a Rs2.5 billion loan (secured by NSS securities) to a single entity. It is simply amazing how such a loan escaped the attention of the central bank supervisors who receive monthly reports from commercial banks listing their loans and the assets securing the loans. This is one case that deserves to be investigated fully. However, the more important question begging an answer is the end-use made of the loan proceeds.

It would be wrong to believe that such loans cannot be questioned because they are adequately secure and do not violate any of the existing banking regulations. To extend a loan, the bank must have a justifiable reason. This is true even for loans extended for non-commercial purposes. Loans granted with absolutely no justifiable commercial or non-commercial reasons, are suspect.

More so, if these loan transactions were entered into with no other understandable reason except fleecing the exchequer (because what the banks and their borrowers stand to earn from these deals is not just a fair intermediation or arbitration income), they are cleverly disguised mechanisms to rob the State. Such loans fall in the category of organized fraud, and the perpetrators must be dealt with accordingly.

Instead of initiating an appropriate punitive action, the government took a self-incriminating and rash corrective step: it stopped altogether the sale of the NSS securities through the banking system to stop more such suspect loans being disbursed. This amounts to admitting the fact that the loans extended earlier, were suspect. It was a rash step because it did not take into account the fact that such suspect loans were not availed by millions of small savers, who form the bulk of the investors in NSS.

Secondly, it also did not take into consideration the fact that investment in NSS schemes, that now exceed Rs. 849 billion, was made possible only by the easy access investors had to NSS through the banking channel given its nation-wide network exceeding 5,300 branches compared to a handful of NSS offices.

Stopping sale, redemption and loaning against NSS securities through the banking system has created problems for investors because NSS offices are ill equipped to serve the huge NSS clientele that the banking sector has built over the years. Secondly, these investors, who largely happen to be old age pensioners, have to wait for hours before being served because of inadequate manpower and manual operating systems at the NSS centres.

Frequently, investors visiting the NSS centres for redeeming the securities or collecting periodic profit thereon, are asked to come back the next day because the NSS offices often don’t have enough cash to meet these demands. Finally, investors going to these centres are placed at the risk of being mugged or robbed, which is not the case at better-secured bank premises.

Instead of taking this rash action, it would have been wiser to restrict the NSS security sales through banks to, say, Rs. 2.5 million per individual, and to impose stiffer and more frequent reporting requirements for loans secured by NSS securities. More importantly, scrutiny of these reports should have been made more purpose-oriented to flash red signal immediately for swift action against erring banks. The restrictive conditions imposed by the ministry of finance only make life more difficult for NSS investors rather than improve the control mechanism.

Loaning against the NSS securities now requires that the facility should not exceed Rs1 million, and that each such borrowing request must be approved by the regional directorate of the NSS. It is unclear what kind of protection this clearance provides, and to whom, because it would be unrealistic to expect that the regional directorates would have an organized database that could identify a person trying to avail borrowing more than once. The only prospects that this condition holds out are over-burdening of directorates with paperwork, errors in loan clearance, and encourage corrupt practices at these directorates.

The most disturbing aspect of this saga has been the conduct of some banks - institutions presumed to be the guardians of the national wealth. It has shaken the belief that bank managers don’t indulge in unethical practices simply for earning their desired profit margins. This is a bad omen. Coming in this backdrop, the report that the central bank has given bankers the freedom to define their own code of ethics and banking practices comes as a bit of a surprise. Undoubtedly, there are a lot of principled bankers still in the profession but given the recent conduct of some banks these bankers seem to be in retreat. The lingering NSS scam should serve as a warning to the regulators; reposing excessive confidence in bankers’ wavering ethical standards may prove inadvisable.