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Govt stops institutional

investment in National

Savings Schemes

SHAHID IQBAL

KARACHI: The Government has stopped the institutional investment in the National Savings Schemes with immediate effect.

The Central Directorate of National Savings has sent a letter to the State Bank which issued a circular on Monday announcing the decision of no institutional investment in National Savings Schemes.

Banking experts said that the new move basically deals with rationalising interest rates, improve liquidity of the financial institutions, discourage the liquidity flow from treasury bills towards government instruments and more funds available for the private sector.

"But the most important aspect of the move is the government's fear that after drastic cut in the rates of T-Bills, liquidity may go to national savings to bag a better return," said a banking expert.

The government and the State Bank both are making effort on two fronts: to reduce the lending rate and to increase the lending towards the private sector.

Currently the return on T-Bills which till recently remained around 8.5 percent, proved depressive for the banks.

The return on National Savings Schemes is up to 14 percent which provides enough margin of profit for the institutional investment.

The NSS has a total investment of about Rs.554 billion of which 10 percent belongs to these institutions.

The institutions do not invest directly in the NSS. They invest on behalf of companies with their permission and share profit.

"The institutional investment is not big but the poor yield on T-Bills will compel them to pump the liquidity in to NSS. The immediate stop of institutional investment will certainly block the possible flow towards NSS," said the analyst.

This will improve the liquidity position of the institutions. It will ultimately result in diversion of money to private sector and reduction in the lending rates.

"The lending rate is still too high despite several attempts made by the State Bank to reduce it. This is the reason that the government has reduced its reliance on the banks borrowing through T-Bills," he added.

Both, the Finance Minister and the Governor State Bank, have been urging banks for rapid increase in lending for the private sector to improve the health of the economy.