HIKE IN RATES OF RETURN ON NSS MAY HIT BANK DEPOSITS

Increase in risk-free rates of return is expected to divert a greater flow of funds towards the save NSS regime

By AMANULLAH BASHAR
July 25 - 31, 2005

Increasing rate of return on National Savings Scheme (NSS) generated a lot of interest in the financial circles which was the news of the last week. However, the retired senior citizens, widows and the people who heavily rely on NSS as a source of income were naturally more interested in the upward revision effective from July 1, 2005.

The government, it may be mentioned, reviewed the rates of return on NSS keeping in view the market demand and in line with the agenda of raising living standard of the low paid income groups. In this context, the government has already increased the salaries of government employees; resultantly the benefits to the pensioners have also been enhanced. The average return of the last six months of PIBs of 3, 5 and 10 years' maturity is considered as yield to workout the profit rate on 3, 5 and 10 years' maturity of NSS.

To accommodate an investor to fully avail the facilities of Pensioners' Benefit Account and Bahbood Saving Certificates, the government has increased the investment limit in these schemes to Rs3,000,000 from Rs2,000,000. This would enable an official of any level to put all such amounts, which he receives as retirement benefits, on these schemes for a regular monthly income.

Though it was a step towards right direction, yet some circles were considering the increase lower than their expectations.

The rates of return on saving accounts, Special Saving Certificates/accounts, Regular Income Certificates, Defense Saving Certificates and Pensioners' Benefit Accounts/Bahbood Saving Certificates have been increased from 4 percent to 5 percent, 6.95 percent to 8.60-8.88 percent and 10.08 percent to 11.04 percent, respectively, with effect from July 1, 2005.

The return on NSS is usually related to the six-month average yields of Pakistan Investment Bonds (PIB) as part of the Government of Pakistan's understanding with the International Monetary Fund and the World Bank. The average return in the past six months on the PIBs of 3, 5 and 10 years maturity is considered as yield to work out the profit rate on 3, 5 and 10 years maturity of NSS.

However, only one auction of PIBs of 3, 5 and 10 years' maturity was made by the Central Bank It may be mentioned that during the last six months, which according to reports could not materialize as the offers received in this period were finally rejected.

In the form of increase on NSS returns, which was described as semi-annual review by some analysts, the government has raised rates of return on National Saving Schemes (NSS) by approx. 1-2pps effective from July 1, 2005. Defense Saving Certificates rate has been enhanced by 131bps and the rates on Special Saving Certificates and Regular Income Certificates have been respectively raised by 165bps and 204bps. The rates of return on Pensioners' Benefit Account/ Behbood Saving Certificates and Saving Accounts have been increased by 96bps and 100bps, respectively.

To have a yield on 3, 5 and 10 years tenor, various options had to be considered to bring the profit on NSS in line with the market position.

In the absence of any PIBs auction during the last six months, the government decided to use PIBs and trading in the secondary market as benchmark for various instruments of the NSS. It may be mentioned that only one auction of PIBs of 3, 5 and 10 years maturity was made by the State Bank of Pakistan (SBP). This could not materialize as the offers received in this behalf were finally rejected.

To have a yield on 3, 5 and 10 years tenor, various options have been looked into, to bring the profit on NSS in line with the market position. In the absence of any PIBs auction during the last six months, the government has decided to use PIBs and trading in the secondary market as benchmark for various instruments of the NSS.

The positive step taken by the government has, however, cast an impact on the stock market which widely anticipated the hike in NSS rates and thus reflected in equity market valuations. Moreover, the magnitude of the increase is also broadly in line with market expectations.

However, the higher NSS rates are likely to cause a slowdown towards the growth in banking sector deposits. It is also said that increase in risk free rates of return is expected to divert a greater flow of funds towards the save NSS regime. Conversion of NSS fund towards Voluntary Pension Scheme which is to be managed by the mutual fund companies was announced in the last federal budget. One wonders that after increase in rates of return on NSS how the investors would respond to that good scheme.

The fundamentals of the stock market appear to be strong with the short-term movements to be determined by developments on the financing fronts.

RATE OF RETURN ON NATIONAL SAVING SCHEMES:
(FOR JULY-DEC 2005)

NAME OF CERTIFICATE

TENURE

OLD RATES

REVISED RATES

Special Saving Certificates (SSC)

3-Years

6.95

8.60

Regular Income Certificates (RIC's)

5-Years

6.84

8.88

Defence Saving Certificates (DSC's)

10-Years

8.15

9.46

Pensioners Benefit Accounts

10-Years

10.08

11.04

Bahbood (Welfare) Saving Certificates

10-Years

10.08

11.04