KARACHI: Investors pulled out Rs317.2 billion on a net basis from the National Savings Schemes (NSS) in 2020-21, according to data released by the State Bank of Pakistan (SBP) on Monday.

Net savings mobilised under the NSS remained negative in the last fiscal year for the first time since 2004-05.

The federal government–run Central Directorate of National Savings (CDNS) bypasses banks and directly generates deposits from the general public at rates of return that are pegged to the cut-off yields on government securities. As a result, ordinary people receive relatively better returns on their savings by eliminating the banks’ cut as intermediaries.

CDNS attracted savings of almost Rs371bn in 2019-20, which was the second highest annual mobilisation achieved in the 17-year period for which data is available on the SBP website. In June alone, the net outflow of savings from the NSS amounted to Rs123.8bn as opposed to the net inflow of Rs4.5bn the comparable month of the preceding fiscal year.

Analysts believe there are three major reasons for the massive outflow of funds in 2020-21: ban on financial institutions to invest in NSS, registration requirement for prize bonds of higher denominations and strict implementation of anti-money laundering laws and know-your-customer (KYC) conditions.

“NSS had minimal AML and KYC requirements compared with banks. The government imposed stricter KYC rules amid growing pressure from the Financial Action Task Force (FATF), which left the biggest negative impact on fund mobilisation,” said Pakistan-Kuwait Investment Company Head of Research Samiullah Tariq while referring to the international watchdog that requires countries around the world to adhere to binding global standards for the prevention of money laundering and terrorist financing.

He said people hesitant to come clean about their sources of funds — something banks ask every depositor at the time of account opening or big transactions — don’t find NSS a suitable option for their savings anymore.

The government’s decision to discontinue unregistered prize bonds of higher denominations in the last couple of years also played a key role in the drawdown on NSS funds.

“People used prize bonds to settle transactions. They were bearer bonds, meaning there was no accounting as to who owned these instruments.

That’s not the case anymore and prize bonds of high denominations must be registered now,” said Mr Tariq.

Moreover, the government barred institutional investors from parking their money in NSS with effect from July 1, 2020. This means firms like insurance and asset management companies cannot reinvest in NSS at the expiry of the schemes they’ve put their funds in.

Major outflows were witnessed from prize bonds and Defence Savings Certificates in 2020-21 with a drawdown amounting to Rs290.4bn and Rs9bn, respectively.

Regular Income Certificates were the only major source of net inflows in the last fiscal year as they attracted Rs26.7bn.

Analysts expect thin inflows in the current fiscal year as well. The government has implemented a hike of up to 50pc in applicable tax rates on NSS profits July onwards.

It means filers will have to pay a tax of 15pc instead of 10pc on their NSS earnings. This is equal to the tax rate on profits earned on banking deposits. Non-filers will now pay 30pc instead of 20pc on their NSS profits.

Debt raised through NSS is unfunded because the government doesn’t maintain any separate fund for its repayment. With a stock of Rs3.6 trillion at the end of March 2021, unfunded debt constituted a share of 14pc in the total domestic debt portfolio.

Published in Dawn, August 31st, 2021