Last update: Wed, 10 Feb 2016 11am
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Restructuring the savings industry

Following lacklustre performance in the first half, the National Savings Schemes pulled up its socks in January. The state-run savings institution raised Rs37 billion (on net basis) in January, compared to an average of Rs14 billion per month in the preceding six months.

At a time when the government’s increasing fiscal deficit is forcing it to rely on domestic banking sources, handsome mobilisation from non-banking sources is a pleasant surprise. With Rs119 billion raised in the first seven months of the fiscal year, NSS is, on average, a little shy of the Rs225 billion full-year target.

Nonetheless, if momentum picks from January onwards, as is the case likely, it can easily surpass the target. In FY09, fund mobilisation by the NSS in the second half was five times the first. And there cannot be a better time than this year to partially dilute the immense pressure on banking sources, as for the first six months of the current fiscal year, two-thirds of domestic deficit financing was from banking sources.

There is ample room for savings schemes to work on the increasing currency-in-circulation (CIC), especially in rural segments where penetration of commercial banks is low. The amount raised in prize bonds (Rs38 billion in FY10 versus average of Rs9 billion in the previous five years) shows that, slowly and gradually, NSS is tapping some of the increases in the CIC.

For other instruments, higher rates offered by various saving schemes give NSS an inherit advantage over commercial banks to channelise savings. At a time when commercial banks are charging decent spreads by channelising low cost deposits mostly into government papers, it makes more sense for depositors to lend directly to the government via NSS.

But niceties aside, critics are of the view that NSS rates are much higher in Pakistan relative to other developing economies.

According to an industry expert, national saving rates in India are at an around 3 percent discount to the government’s 10-year bond, whereas in Pakistan it is compatible to the PIB cut-off. “This is hindering the growth of the asset management industry, as well as that of the corporate debt market in Pakistan,” he said on condition of anonymity.

Well, that argument has weight, and on a related note, the lazy bankers in Pakistan should be incentivised and regulated, such that they move away from lending to the government and a few big families and corporate names, towards the largely untapped SMEs, agriculture and consumer segments.

At the same time, the big corporates should stop relying on commercial bank borrowing and instead raise money from individual savers for their working capital and long term needs. Engro Corporation has taken one such bold step in this direction, and with time, the trend should catch up to a point where corporations compete for funds through attractive returns that might otherwise be channelised to the NSS.

Restructuring NSS rates on the regional model will make it more cost-effective for corporates and incentivise them to raise funds directly from individual savers. This would also help the fixed income mutual funds to be attractive for individual savers, pave way for the development of investment banking in Pakistan, and put pressure on commercial banks to find new avenues like SMEs and offer better rates for lending.

Owing to inefficiencies that mark a typical public sector entity in Pakistan, and lack of awareness amongst the investing community at large, the NSS tradable bond was a failure; to date it has only raised Rs3.6 billion. However, the NSS Director General, Zafar Sheikh, is confident that its re-launch at higher rates would be able to attract investors.

Sheikh is also striving hard to launch a short-term instrument pegged at T-bill rates for individual savers. But the banking lobby, and rightly so, has so far been able to corner this proposal on fears of large withdrawal of deposits that may put to risk the overall financial stability of the banking system.