Pakistan: New saving schemes to trim banks profit

ERUM ZAIDI
KARACHI – The recently announced new short-duration national saving schemes are likely to cause a decline in the banking sector profitability which may ultimately affect the spreads by the end of current calendar year.
With the introduction of these new short duration savings scheme, the profitability of the banking sector could be negatively impacted, since banks in order to retain their depositoRswould be forced to increase their deposit rates.
Research analyst said that currently out of the total banking sector deposits base (which stands at Rs3.6 trillion), CASA (Current Account and Savings Accounts) occupies the largest (around 61pc) share followed by fixed deposits around 31pc shares. Average return on CASA is estimated to be around 2pc while that on fixed deposit is in the range of 8-10pc.
“With the introduction of these new products having return equal to that of T-bills, we might see a shift from abysmal low cost current and savings accounts to these papeRssince rate of return on market driven T-bills currently ranges between 9.6-10.1pc. This could, as a result, reduce the banking sector spread, going forward,” he added.
He also said “In our valuation models for the banking sector, however, we have already assumed declining spreads for the sector beyond 2008. Therefore, we continue to maintain our ‘Over-weight’ stance on the banking sector of Pakistan with ‘Buy’ on UBL, NBP and BAFL”.
According to State Bank of Pakistan’s (SBP) Jan 2008 data, average return on deposits rate is 4.19pc. In contrast, banks have been lending at an average rate of 11.26pc. As a result, average spread of the banking sector in Jan 2008 stood at 7.07pc.
It is unclear at when these schemes would actually be launched. Moreover, it is also yet to be seen what the new government stance would be on them. 
It has reported that CDNS (Central Directorate of National Savings) has decided to introduce three multipurpose short duration saving scheme for the general public. This step is taken in order to minimize reliance on bank borrowing by the government. 
Aimed primarily to reduce government’s bank borrowing which currently stands at Rs1.1 trillion (Rs704.3bn from SBP and Rs402.3bn from scheduled banks) as on Mar 01, 2008, CDNS plans to introduce papeRsof short duration that is of 3-months, 6-months and 1-year for the general public. As per the same news item, return in proportion to the prevailing Treasury Bills rates determined by the market would be given on these papers.
CDNS has earlier been issuing 3, 5 and 10 yeaRsduration papeRsand as per National Savings Organization, total outstanding amount on these schemes stands at Rs1,118bn, as of Jan 2008. The following table lists currently available National Saving Schemes (NSS), their profile and outstanding amounts:
The increase in the fiscal deficit during Q-1 is reflected in the substantial increase in government domestic borrowings which acceded to 4.5 percent of GDP in FY08.
In Q1-FY08, the government’s net budgetary borrowings from the banking sector registered a growth of 102.4 percent YoY on top of a growth of 132.4 percent YoY in the same period of FY07. Within the banking system, net government borrowing pattern changed structurally in Q-1 FY08. In this quarter, the government borrowed heavily from scheduled banks and used these borrowings to retire some of its liabilities to SBP. Therefore, the government’s borrowings from the central bank, in particular, have resurged strongly, with part of the increase being offset by a decline in borrowings from commercial banks. 
In Q-1-FY08, government received Rs85.5 billion of financing from the scheduled banks. The increase in the banks’ appetite for government securities reflects a slowdown in the private sector credit demand coupled with the increase in return on the government securities. This led the banks to invest heavily in risk free government securities. In non bank borrowings higher mobilization under NSS and PIBs in Q-1-FY08 raised non banks’ share in government budgetary financing.
Inflows in NSS instruments increased significantly in Q-1-FY08, despite only a marginal rise in rates of returns on these instruments. Defense Saving Certificates, Special Saving Certificates and Special Saving Accounts that had seen net retirements in the same period of the previous year become source of financing. The increased volatility in the capital market and relative slowdown in the prices of real estate as well as the reopening of these schemes to institutional investoRsmight have helped in increasing the NSS in QI-FY08.

Courtesy: The Nation, 18/3/2008