Saving to save the economy

Its been more than six months since the return on the National Saving Schemes products has remained unchanged. The culprit being: no change in the policy rate in past six months, and a consequently flat movement in the yield of Pakistan Investment Bonds that NSS instruments usually track.
But with the market expecting interest rates to budge down in the coming six months, the current rate level on NSS provides a high time for investors to lock their investments for longer tenure.
The previous years data suggest that investment in NSS was soft during the low interest rate environment and its high time to grab more funds in this domain before profit rates are slashed on NSS instruments.
Moreover, to capitalise on this non-inflationary borrowing window, reportedly three short-term NSS products are currently in the making, with a target to raise a total of Rs100 billion.
The move follows a series of initiatives taken by the government to move away from bank borrowing and to foster public savings. This will also relieve governments borrowing pressure from the commercial banking sector, which has recently increased at the cost of private sector investments.
Similarly to facilitate individuals to invest in sovereign instruments; the SBP, last year made it mandatory for primary dealers to offer Investor Portfolio Securities (IPS) account.
This initiative has supported appetite for treasury instruments among individuals, but the market believes that banks are reluctant to market sovereign instruments, as this limits the banks potential to garner low cost deposits.
Since the government is throwing their weight behind instruments that promote direct borrowing from the individuals, such as NSS, this would definitely pull the rug from under the commercial banks that are competing (or perhaps colluding??) for low cost funds.
This may push commercial banks to tap the increasing out-of-system money in the countrys informal and rural economic segments. The development might also limit the governments appetite for borrowing from the commercial banks that are minting money on the back of growing exposure in risk free investments.
However, the policymakers must not overlook caveats that are preventing money from sloshing into the NSS. The share of NSS stock as a percent of total deposits (including NSS) in the system reduced to 25 percent at the end of the first ten months of FY11 from its peak of 38.6 percent in FY00, according to the SBP.
To drum up investors attention, the government needs to bolster marketing activities for the NSS to ensure that idle funds that are making their way into low risk premium investments and low deposit accounts, should instead wind up at the NSS counter that is offering lucrative risk-free return.
Moreover, there is a dire need to improve the customer services at NSS centers and bring them at least at par with the commercial bank branches. Last but not the least, the policymakers should also understand the need to integrate NSS into mainstream capital markets by making them tradable at the bourse.
The backing and filing to revive the public saving market is expected to continue. But, once these catchy saving products come in the market, the commercial bankers, primarily small, will have to pull up their socks if they want to survive in the business.