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TAHIR DHINDSA

adds from Islamabad:

The matter of institutional deposits in the schemes was reviewed by the Finance Ministry after the Asian Development Bank's demand for exemption of 10 percent withholding tax on term finance certificates.

Also, the government found that banks were not showing adequate interest in credit disbursement to the private sector as some national saving schemes were offering better net returns on investment. By ordering the withdrawal of institutional deposits from NSSs the economic managers hope to make that extra capital available to the private sector.

Soon after coming to power, the government in consultation with the State Bank of Pakistan, which is the regulator, imposed 10 percent withholding tax on the NSS profits and returns on banks saving deposits.

But, a few NSSs have been enjoying exemption from this withholding tax. As a result commercial banks, mainly the nationalised commercial banks had made investments in the schemes.

The ADB had made investment through term finance certificates via the National Bank of Pakistan. The capital was made available at Libor plus 2.5 percent and more. After the imposition of 10 per cent withholding tax on its return the net profit margin was reduced and capital started flowing into the national savings schemes. The ADB then demanded a level playing field from the State Bank.

The government has recently announced a cut in the rates of return on the NSS deposits bringing them to between 12 and 16 percent. It also slapped 10 percent withholding tax on most of them. But, those few schemes, which are still enjoying exemption from withholding tax, are causing all the irritation.

The government had been sympathetic to the NSSs, as mostly, old people invest there. "But, the institutional deposits were clearly against the spirit of the savings," sources concluded.