KARACHI, Sept 30: People made net withdrawal of Rs1.1 billion from national saving schemes in July this year. Top bankers say they were anticipating this. Some of them say this trend would continue.
Bankers say they were expecting negative inflow of NSS for two reasons: (i) the government had made a significant cut in NSS rates in July and (ii) people who had got loans using defence saving certificates and special saving certificates as collateral had to liquidate them. They had to liquidate these certificates after the government stopped banks in mid-June from rolling over the loans made against them. That explains Rs847 million worth of net withdrawal from special saving certificates in July this year — the first ever net withdrawal seen in SSCs.
In last fiscal year SSCs continued to attract huge investment throughout the year and there was no negative inflow in these certificates in any month. In fact SSCs attracted in the last fiscal year a huge investment of Rs84.6 billion — or more than 78 per cent of the total investment of Rs108.1 billion in all instruments of NSS combined.
“So the only explanation (for a negative inflow in SSC) could be that those borrowers who had got loans against SSCs until June liquidated them in July,” said treasurer of a local private bank.
Bankers offer the same explanation for a very nominal inflow in defence saving certificates or DSCs. In July this year DSCs attracted only Rs422 million investment which is much lower when compared with the monthly average investment in DSCs in the last fiscal year. In July-June 2002-03 investment in DSCs totalled around Rs22bn or a little less than Rs2bn per month.
In mid-June this year the government stopped bank branches from selling DSCs and SSCs and also refrained them from rolling over those loans that were made against them. The reason was that some top corporates had secured low-cost loans and used the same for buying DSCs/SSCs and then pledged them as collateral to seek new loans. Top bankers say not less than Rs22 billion investment was made in DSCs and SSCs in this fashion. This helped the so-called investors. They got bank loans at 4-6pc to buy DSCs and SSCs which at that time were yielding 10 per cent and 8.6pc profit respectively. Thus the investors made extra profit of 2-4pc through this activity — and also used the DSCs/SSCs as collateral for seeking fresh loans. Banks equally gained under this arrangement for it helped them make loans to prime borrowers against zero risk collaterals at a time when they were awash with excess liquidity and making zero-risk lending was not possible.
The government was net loser. Because this over-investment in NSS unnecessarily increased its cost of domestic borrowing. The government did not need to borrow much through NSS for falling treasury bills yield had made them a better instrument for debt raising. The cut-off yield on benchmark six-month TBs had fallen 4.63 percentage points in last fiscal year — from 6.28 per cent to 1.65 per cent.
The latest figures relating to inflows in various instruments of national savings posted on SBP website shows that regular income certificates or RICs also saw a negative inflow of Rs2.8 billion in July. “But this does indicate only the continuation of an old trend — and nothing else,” pointed out a seasoned local banker.
In eleven out of 12 months in the last fiscal year RIC did see a negative inflow: In the entire fiscal year 2002-03 negative investment in RIC was at Rs14.8 billion. Bankers say people are taking money out of five-year RICs because of the falling rate of return. From July this year the government has further reduced the rate of return on RICs from 9.12 per cent to 7.68 per cent.
Bankers say declining return might also have been responsible for very nominal investment in DSCs and net negative inflow in SSCs in July this year. From July 1 this year the government did reduce the rate of return from 10.03 to 8.50 per cent on 10-year DSCs — and from 8.67pc to 7.67pc on three-year SSCs.
Unlike RICs and SSCs that saw negative inflow in July this year DSCs did attract Rs422 million investment and all other instruments of NSS combined fetched Rs2 billion.