KARACHI, Oct 28: Bank deposits have started to fly towards the National Saving Schemes (NSS) of which rates were recently revised upward, said banking sources.

The immediate impact of this shifting resulted in the higher interest rates and the money market witnessed a rise in the Kibor.

After the clear message from the State Bank that the government should borrow from other than banking sources, the NSS rates were increased. At the time of increase, the banking industry was critical about the rise in the NSS rates and predicted that a shift of deposit would take place.

This shifting has already hurt the deposits of banking industry and ultimately the credit to private sector slowed.

“The policy to borrow through the NSS is attractive for the government but it is harmful for the banking industry, which showed enormous potential and record growth in both supply of credit and profits earning,” said a high official of a leading Pakistani bank.

Analysts said that the lower credit outflow towards the private sector would hurt the economic growth but will help the government to bring down the inflation as the high inflation generated food price hike. This food price hike, which touched the double-digits inflation, marred the government’s popularity.

“It is well thought-out policy of the government to cool down the over- heated economic activity resulting in high inflation, which is harmful for poor countries like Pakistan,” said Abid Zubair, an analyst.

He also pointed out that the government had yet not come out with bonds schemes to attract investment despite first four months of the current financial year have already lapsed.

The only announcement came from the SBP, which announced a PIB (Pakistan Investment Bonds) auction for the October 30, 2006. The target amount for the auction is set at Rs15 billion, with Rs5 billion worth of 3-year PIBs, Rs3 billion worth of PIBs in five and ten years tenors, and Rs2 billion in fifteen and twenty years PIBs.

The central bank plans to keep the coupon rates at 9.1 per cent, 9.3 per cent, 9.6 per cent, 10 per cent, and 10.6 per cent for the three, five, ten, fifteen, and twenty years bonds, respectively. While the coupons in the three, five, and ten year tenors are the same as the previous PIB auction held on May 19, 2006, fifteen and twenty year bonds were not sold in that auction. “Given that the secondary market yields on all tenors are higher than the coupons being offered, some coupon revision is likely, and the bonds may be issued at a discount. If market clearing rates are not offered, insurance companies and banks (to a small extent) are the only likely bidders in the auction, as they are not allowed to invest in NSS,” said Farrukh Karim Khan, analysts at JS ABAMCO.

Bankers said that the interest rates were gradually increasing which reflected from the higher rates in the Karachi Inter Bank Offered Rates (Kibor).

The benchmark 6-month Kibor rose to 10.57 per cent versus last week's level of 10.54 per cent. One month and 3-month Kibor rates, respectively, rose to 9.71 per cent and 10.32 per cent against last week's levels of 9.70 per cent and 10.29 per cent.

“The recent rise in Kibor is indicative of out-flows from the banking system due to the change in NSS regulations,” said Mr. Khan.