NSS inflows in dribs and drabs

For investors, CY12 started on a negative note. Interest rate went downhill during the latter half of CY11, now interest-bearing instruments will yield lower interest income for lenders. The rate cut also followed down to National Saving Schemes (NSS) products, given that government has lowered profit rates on saving scheme products. This is in continuation of downward revision in rates seen in October last year. The profit rates on the most popular scheme: Behbood Saving Certificate, which shares nearly 28 percent of the saving scheme pie (excluding prize bonds), fell by 54 bps, resulting in a total cut of 1.5 percentage points since the revision in October. As inflows into NSS have exhibited strong correlation to interest rates, profit rate cut is the ugly downside to NSS. Hence, the market expects that more funds will now queue up to seek refuge in banks deposits. Although, NSS products offer put option to its investors, such as early encashment facility and lucrative returns, its role in domestic debt pool has been fading out. Saving schemes portfolio has inched up by 19 percent since the start of FY11 (during the past 17 months till November 2011), but its contribution in the total domestic debt pool has eased down by 5 percentage points to 24 percent at the end of November 2011. This is down to the banks growing appetite for treasury instruments, including T-bill, PIB and Ijarah Sukuk, where funds (outstanding) have been nearly doubled during the period under review, thereby, hijacking the total domestic debt, with a share of a whopping 51 percent at the end of November 2011. A pressing issue is banks growing focus in treasury instruments, which is not only crowding out private sector investments but also cannibalising demand for savings scheme products. This highlights the need to beef up initiatives to foster inflows in saving scheme products. However, to lubricate inflows, there is a need to introduce shorter tenure instruments, expand reach and improve quality of service at NSS centres. This will facilitate individuals to channels their funds directly towards the governments kitty, reducing the borrowing pressure from commercial banks which are minting money by thriving on low cost deposits pool. Above and beyond, this will compel banks to claw their way to the private sector lending, thus, resuming the banking industrys role as a financial intermediary.