Sliding returns on National Saving Schemes fit well into the current low interest rate structure. But a big fall in NSS returns over the past three years is pushing people to use their savings to feed rent-seekers’ appetite for funds.

From the first quarter of FY13, the rate of return on NSS has been gradually cut by about five percentage points. And, now even the 10-year saving scheme for senior citizens and widows is offering just a shade above 9pc annual return. Defence Saving Certificates of equal maturity, which can be bought by all, pay a far lesser return of 7.3pc.

The government has cut returns on NSS citing low inflation and falling interest rates. But it is known to all in financial circles that the yield on long-term Pakistan Investment Bonds serve as a benchmark for resetting returns on NSS. “And this linking has been accepted as a norm promoted by multilateral lending agencies including the IMF and the World Bank,” recalls a Ministry of Finance official.

In FY15, purchase of Rs76bn in prize bonds constituted 22.5pc of overall investment in National Saving Schemes

The government efforts to push sales of its bonds through stock exchanges and to sell PIBs and treasury bills to individuals have met little or no success primarily due to ‘opposition and of lack cooperation of banks.’

Low returns on NSS are helpful for banks in mobilising cheaper deposits and help the government in keeping its cost of domestic debt in check. When NSS rates are cut the payable amount on NSS stock and on sales shrink benefiting the government of the day. It also enables the government to borrow from banks at lower rates because banks take it as a clue that the government is in no mood of raising domestic debt at high rates. They adjust their demand for rates accordingly, while lending to the government through treasury bills and PIBs.

Banks’ lending to the private sector in the last three years has remained far less than the earlier normal, despite a jump seen in the last year; banks are sitting on piles of liquidity. That explains the government’s appetite for short-term funds, regardless of the falling interest rates because large-volume lending offsets low interest rates.

The government’s huge bank borrowing and over-investment in government debt-papers is fattening bank’s interest income. But as a result of this, banks’ advance to deposit ratio has fallen below 50pc, genuine credit demand of the private sector is not being met fully and people are compelled to shove a big chunk of their savings into parallel banking. As a result the informal economy is expanding.

A decline in NSS rates and a consequent sympathetic fall in the rates of T-bills and PIBs have been a blessing in disguise for corporate term finance certificates and investment schemes of mutual funds. Investment in mutual funds, in particular, has been growing noticeably. The investment comes in mostly from companies or from financially literate individuals of high net worth.

Lots of common people with small savings, among them senior citizens and widows, still prefer NSS simply because people are familiar with them and find it is easier than investing in mutual funds and TFCS.

Depriving these people of a decent return can be counter-productive in the long-run. Signs of this are already emerging. For quite some time, people have been making more investments in prize bonds than in NSS.

Further cuts in NSS rates will only augment this trend and “we’ll have prize bonds in the name of debt instruments designed for raising funds for the government from the general public,” warns a former director general of National Savings (formerly Central Directorate of National Savings). And, this warning is not off the mark. In FY16, fresh investment in prize bonds totalled Rs124bn, or 53.4pc of Rs232bn put in all modes of NSS. In FY15, investment of Rs76bn in prize bonds constituted only 22.5pc of Rs337bn overall investment in NSS.

As the stats reveal, people are now investing less money in NSS. And, a larger chunk of even this money is being parked into prize bonds that are widely used for whitening black money.

In its debt policy report of FY16, the ministry of finance had said there was a need to integrate NSS instruments ‘into the mainstream capital market’: make these instruments tradable and offer investors a ‘put option’. Sources in the ministry say that the idea might be implemented during this year.

Published in Dawn, Business & Finance weekly, September 12th, 2016