Corporate sector entry in NSS to hurt banks deposits

KARACHI - The overall deposit growth of the banking sector may remain stagnant in this fiscal as corporate
sector has been allowed to invest in National Saving Schemes (NSS).
Therefore with relatively higher returns NSS has the capacity to hurt the deposit growth of banks.
The higher deposit cost pressure for banks is anticipated to exist due to higher NSS target for FY10, while
inter-bank competition is also expected to persist for deposits on account of prevalent differential between NSS
rates and banks weighted average deposit rates (7.54 per cent) which are remained significant.
It is mentioned that the profit rates on NSS has been reduced from 0.5 per cent to 1.9 percent on different
schemes. The new rates on NSS components would be applicable on new deposits to be attracted by the
schemes from July 1, 2009.
Research analyst at Invest Cap while analysing the impact of NSS profit rates cut on banking sector said the
downward revision complements expectations of monetary easing. However, the government decision to
finance the budget through NSS would call for relatively higher returns compared to other investment
opportunities, such as government securities for corporate and bank deposit for individuals.
He further said during 1HFY09, banks assets growth got skewed towards investments as the recent update
from SBP shows investments growth of 35 per cent CYTD (Rs349b) while advances grew by a meagre 0.2 per
cent (Rs5.6b).
The asset growth during the period remained heavily dependent on SBPs injection which is evident through
relatively slow growth of 4.9 per cent (Rs191b) in deposits during the period, he added.
Considering the slow growth of money supply, we anticipate these trends to continue in short term, at least till
the sizeable foreign inflows materialise, which are expected in 2QFY10 he projected.
The govt has announced 1QFY10 targets of Rs325b and Rs30b for T-bills and PIBs respectively, down by 38
per cent and 25 per cent on quarter-on-quarter basis. However, target for NSS has been increased by 78 per
cent to Rs231b for FY10, which indicates higher reliance on NSS for budgetary financing, he added.
Earlier, the Federal government announced amendments in tax regulations for provisions/bad debts by allowing
provisions up to 1 per cent of advances.
As per amended 7th Schedule of Income Tax Ordinance 2001, provisions for advances and off-balance sheet
items shall be allowed up to a maximum of 1 percent of total advances, subject to certification of external auditor
for compliance of Prudential Regulations.
Analyst said the development is expected to have a positive impact on banks profitability. However, concerns
remain for banks due to weakening asset quality as provisioning in excess of 1 per cent would not be allowed to
be carried over to subsequent years. As per historical analysis, incremental provisions normally remain in the
range of allowed limit. However, economic slowdown has impacted asset quality significantly which can widen
differentials in tax and accounting expenditures.
As per amendments, 'sub-standard category shall not be allowed as expense, only 'Doubtful or 'Loss will be
considered for adjustment. Total NPLs of the banking sector stood at Rs379b as of Mar-09, from which
substandard constitutes only 20 per cent.
Meanwhile, the Central Directorate of National Savings slashed the profit rate on Special Saving Certificate to
11.62 per cent; profit rate on Revenue Income Certificate 12 per cent.
Rate on Pension and Behbood Certificates went down to 14.16 from 16.10 per cent. Profit rate on Saving
Certificate was brought down to 8.5 from 9 per cent. The profit rate on Defence Saving Certificate was not
reduced.