Roshan Digital Account - an overview

ARTICLE: State Bank of Pakistan has taken yet another good initiative by launching Roshan Digital Account (RDA) in partnership with major banks. It is probably the outcome of the changes in the global financial environment and breakthrough caused by technological and telegraphic changes in the banking industry. Digital identity system is also part of FATF Methodology for assessing compliance and effectiveness of AML/CFT systems.

Digital transformation is playing an important role in reducing gaps in the banking system by narrowing down the risks and boosting business activities in the industry. Technology is of immense help to bank branches. It supports a bank's overall networking system and helps provide quality services at lower cost.

The sole purpose of introducing RDA is not only to cater Non-Resident Pakistanis (NRPs) by integrating it with the banking and payment system to serve expatriate Pakistanis, would also encourage remitters to use official channels; this would certainly give a boost to remittances.

In FY2018 and 2019, SCRA (Special Convertible Rupee Account) was a blessing in disguise. It gave a huge support to the country's borrowing economy by providing USD 4 billion liquidity and simultaneously injecting a rupee liquidity amounting to 650 billion into the banking system, when banks sold US dollar for rupee to buy T/bills/bonds. It had also helped reduce government borrowings and the number of SBP OMO (Open Market Operation) injections.

On average, foreign investors may have earned between 11%-12% return due to higher yield on government paper, but they lost nearly 7% at the time of repatriation of funds due to rupee depreciation, which was Pakistan's gain as fewer US dollars were remitted due to a weak rupee. The net loss of 4%-5% in the shape of interest payment is far better than raising funds through Eurobond at around 6% to 7% in view of Moody's rating, which is B3.

It is important to understand that Eurobond and Gulf/other deposits are only good for book entries to show increase in Foreign Exchange Reserves and for BoP (balance of payment) at the cost of interest payment and heavy exchange loss that ultimately increased debt. Whereas SCRA (Rs 30.6 billion), FE-25 Deposit ($7.746 Billion) and Derivatives ($5.774 billion) do both. It helps in providing forex and rupee liquidity to the banking system.

There are roughly 600,000 individual foreign currency accounts (FE-25) with $7.746 billion in FC deposits, which roughly average $12.910, of which total investment by residents is of $6.858 billion and Non-Residents' $888 million. Hence, there is low risk of portfolio shift to RDA.

Roughly 8.6 million Pakistanis are living abroad. Of them, the number of immigrants and dual nationals is well over one million. In the Gulf region, there are nearly 4.5 million Pakistanis. Eighty percent of them are unskilled laborers. They are, therefore, unlikely to participate in the RDA scheme.

Of those who have settled down in Canada, Australia, the US, the UK and other parts of Europe (nearly 2 million), only few will be able to open RD account or even if they are good earners, they may not have enough funds to spare due to their borrowing commitments, which is part of Western culture. Sadly, of the total number of overseas Pakistani population, only 12-%15% must be skilled professionals.

This means there may not be enough room left to engage Pakistanis living abroad. SBP should continue to target Pakistani unskilled workers as they are very large in terms of numbers.

However, the RDA scheme is quite tempting that should attract investors through Naya Pakistan Certificate (NPC). With a flat 10% withholding tax, issued by the Government of Pakistan (GOP), it offers a very attractive rate. Out of the two schemes, NPC $ certificate is ideally the best product that offers both. Not only does it offer extremely attractive rate to even small investors, it also provides hedge if invested in USD.

Since PKR carries a depreciation risk, it will largely depend on an answer to the question whether or not investors are keen to buy Pakistani Stocks or interested in investing in Pakistani real estate market.

Investors may carry a long list of queries. SBP website should provide a list of FAQs.

Since Pakistani investors are based in foreign countries, it is expected that while calibrating the RDA policy, SBP has surely done extensive working and covered all the legal aspects before launching the product.

In the 1990s, the US Securities and Exchange Commission acted against State Bank of Pakistan on charges of violation of Section 5(c) for launching bearer certificates issued by the Government of Pakistan.

Hopefully, this is not in violation of rules of a foreign country. Overseas Pakistani can open this account without any hassle. A dual national, however, can encounters some serious issues relating to taxation matters and local laws.

Banks will get advantage of waiver on 5% Cash Reserve Ratio (CRR) on deposit of one year & beyond. But in case of earlier withdrawal, banks will be required to deposit 5% CRR. Investors should be informed that in such a situation a penalty will be imposed, which will be deducted from the deposit amount.

For NRP investors the biggest concern or issue would arise in the event of death of the account holder in a foreign country. How will the matter be settled/resolved? The documentation and laws differ from one country to another. Or how will the law apply, if divorce takes place between the spouses?

Dormant account policy becomes a pain in the neck for FC account holders after one year. Every individual does not visit Pakistan annually. Or, what if no activity has taken place in an RD account for more than 365 days? Then, will the account become dormant? This period should be extended to 3 years.

How much is the minimum balance required and who will bear the cost for cheque delays? For small account holders depending upon the bank arrangement with the corresponding bank, fee will be charged.

At the time of opening of RDA, customers should be asked/told about the bank charges or fees, to be paid for cheque clearance that may cost $ 5-15 per cheque, which is quite a lot though customers with sizable balance may enjoy a free cheque clearance facility.

What about the ATM facility? Is it permissible to withdraw cash dollar from ATM?

(The writer is former Country Treasurer of Chase Manhattan Bank)

Copyright Business Recorder, 2020