KARACHI, June 11: The government’s plan to borrow directly from public by launching security papers and increasing return on National Saving Scheme by 2 per cent will hit hard the entire banking sector.

Finance Minister Naveed Qamar in his budget speech announced that the government would launch papers to borrow from public. These papers will be of 3-month, 6-month and 12-month maturity.

The government has already borrowed excessively from the State Bank and it has been issuing warning that heavy borrowing of over half a trillion plagued the economy with high inflation.

The new scheme to borrow directly from the public is only the change of window as the scheme indicates that the government would still rely heavily on borrowing, not from the SBP this time but from the public.

The minister also announced that the rate of NSS has also been increased by 2 per cent to attract more from the public. He also said the rates will be reviewed after three months instead of six months.

The revision of rates after every three months will put enormous pressure on banks to increase their return on deposits.

Both these steps would bring negative impact on banking. After launching of three papers the government will be in competition with banks to mobilise deposits. The banks will find it hard to compete with the government as the former requires higher margin of profits while the government has no problem to offer higher interest rates.

At the same time, the increase in NSS rates would also deprive banks from the deposits. Either the banks would increase return or allow their deposits to fly from banks to the NSS. The new government would also attract banks’ deposits thus minimizing their profits.

“The cost of funds for banks is bound to increase after launching of government papers and increase in NSS rates. These steps will also substantially reduce the interest income of banks,” said a senior analyst.

Bankers believe the new schemes will not increase the national saving rate and instead, the deposits lying with banks would find a new corridor to move.

The finance minister also announced to increase excise duty on banking services from 5 per cent to 10 per cent. Banking analysts said it would not have a major impact.

The minister increased the load on banks’ depositors by raising the tax on withdrawal of Rs25,000 and above from 0.02 per cent to 0.03 per cent. This tax has been under sever criticism because it is the tax on already taxed money and was termed as the gift of Pervez Musharraf government.

However, the new government chose to follow the same path instead of abolishing the tax on withdrawal of already taxed money.