KARACHI, Oct 2: The depositors could expect better return as the banks would face tough competition in attracting deposits in the aftermath of the much-criticized decision to allow institutions to invest in national saving scheme (NSS).

The government recently lifted ban on institutions to invest in national saving schemes in an apparent bid to diversity its borrowings.

The vital decision was apparently taken as per the advice of the State Bank, which had asked the government to shed load on the SBP by reducing short-term T-bills borrowings.

“Most critical will be the need to diversify the source of domestic borrowings to keep central bank financing within manageable limits, among others, by issuing long-term debt, which would set a benchmark for catalyzing corporate debt,” said the SBP monetary policy for July-December 2006.

The Treasury bills stocks have gone up to a record high level of over half a trillion rupees. The SBP failed to sell its stocks, which means additional supply of cash to the economy creating inflation.

Analysts said that the banks would indulge in a war of deposits mobilisation and that ultimately will increase return to the depositors.

The banks have been maintaining over seven per cent banking spread neglecting the depositors but the decision would allow them to shift deposits for a better yield.

Analysts believe that to attract deposits the NSS rates would be increased, which would be extremely harmful for the banks.

“If the NSS rates are increased the flow of deposits towards the scheme will create liquidity crunch and the money would be costlier for the borrowers of the banks,” said an analyst.

The impact would produce cyclic effect. The banks would increase lending rates to pay more to the depositors, which ultimately increase the cost of production.

However, liquidity shortage would help the State Bank to keep the monetary growth under control as less credit is expected to be used by the private sector.

Since 2003, the outflow from the scheme was to the tune of Rs129 billion, mainly because the rates of NSS certificates were reduced.

“Instead of issuing bonds to borrow, the government took the decision to borrow from institutions, which would badly hit the mutual funds, asset management and equity market,” said Salman Jaffrey, analyst at the JS and Company.

“While banks were already engaged in a war of deposits amongst themselves, they are now faced with an additional non-banking competitor for their deposits,” said another research report of KASB Securities.

The cash-rich corporate are now in a better bargaining position to get higher rates from banks given availability of an alternate risk-free instrument. “Hence, one should expect net interest margins of banks to come under pressure,” it added.

Most of the researchers said that the impact on equity market would be negative; however, some market experts believe that the impact would take time to reach the equity market. They said the banks would immediately face the output of the decision.