KARACHI, Dec 22: Banks’ deposits have started shifting fast towards National Savings Scheme (NSS) adding frustration to the already shaking banking industry in the country.

Bankers said that the government put itself in a better position to attract deposits through NSS as their rates are not only attractive but are risk free.

In the first week of December the government increased the NSS rates up to 16.8 per cent, which forced the banks to come in competition with the government.

However, only few banks showed the courage to promise 18 to 20 per cent return.

“Higher return on deposits carry more risk as the banks will have to rent this money at 22 to 24 per cent, which is certainly risky,” said a senior banker.

He said the high interest rate had already started showing negative signs as the default rate was escalating despite better risk management skills acquired by banks.

The banks under serious liquidity problem said the government’s move to mobilise funds through the NSS at much higher rate has put the banking industry at risk.

The banks have no data to show the volume or speed with which the deposits are shifting towards NSS but the four months (July-Oct) data reveals that flow of deposits has changed the direction.

During the first four months of the current fiscal year, the government succeeded to mobilise Rs34.579 billion through NSS, which is equal to 40 per cent of what it mobilised during 2007-08.

Last year, the government mobilised Rs86.639 billion, which was the highest in a decade.

“The NSS trend is against the interests of banking sector as the cash-starved industry is under mounting pressure of tight monetary policy,” said Abid Saleem, an analyst.

The State Bank has been maintaining a tight monetary policy stance for last four years but after the recent agreement with the International Monetary Fund (IMF) the government raised policy interest rate to 15 per cent, which is the best tool to further tighten the liquidity flow into the system.

The IMF restrained the government not to borrow from the State Bank forcing it to raise funds through security papers and commercial banks.

Since the increase in the return on Treasury bills, banks have started piling up their deposits at T-bills counters causing a less flow of credit towards the economy resulting in a slowdown.

The banks invested over Rs100 billion in last week auction and mostly in 3-month Treasury bills, which offers about 14 per cent.

“Banks’ investment in T-bills may be helpful for the government but against the economy,” said Abid.

Both analysts and bankers believe that the policy interest rate will be increased by next month as the government could not meet the demand of IMF.

As per the agreement the State Bank will increase interest rate if the conditions put by IMF are not met in time.

If the interest rate is increased by 1.5 per cent then the NSS rates would be revised upward and that will be a serious blow to the banking industry.

Banks have stretched out maximum with all possible elasticity in its system to offer up to 20 per cent return on deposits.

Analysts said the return around 20 per cent is highly risky for the banking industry but the banks are taking risk to protect them from the danger of being failed.