Reduction in NSS rates

Effective from 1st November, 2019, the Central Directorate of National Savings (CDNS) has reduced profit rates on all the National Saving Schemes (NSS) sponsored by the government. According to its announcement on 7th November, 2019, the new rate for Defence Saving Certificates has been decreased from 13.01 percent to 10.68 percent per annum, for Special Saving Certificates from 12.90 percent to 11.13 percent and for Regular Income Certificates from 12.96 percent to 10.92 percent. Likewise, the rates of Saving Accounts have been lowered from 10.25 percent to 8.20 percent while the rates of Bahbood Saving Certificates and Pensioners' Benefit Account have been decreased from 14.76 percent to 12.48 percent. However, the government has decided to keep unchanged the rates of returns on short-term (3 months), medium-term (6 months) and long-term (12 months) certificates at 12.08 percent, 12.18 percent and 12.28 percent per annum, respectively.

It may, nonetheless, be noted that the decline in profit rates on NSS this time was against the expectations of the investors because they were generally looking forward to getting higher rates after the latest increase in the policy rate by the SBP. To clarify the situation, a senior official of the CDNS has explained that the rates on NSS schemes have been reduced due to the current market situation, in particular the declining secondary market yields on long-term PIBs and T-bills. This means that the interest rates on NSS do not depend on the adjustment in policy rate but are linked with the market yields on long-term government paper. Another factor could be excessive flow of funds for investment in the NSS. The CDNS had collected more savings than expected so far and had revised the yearly target upward from Rs 324 billion to Rs 400 billion. Anyway, a big cut in the NSS rates would be a rude shock to the investors, particularly the pensioners, senior citizens and widows who mainly depend on this secure source of investment for their survival. The decline in NSS rates would be very painful for these groups of people because the rate of inflation is still in double digits and the government's claim of reducing it to a single digit in the next few months cannot amuse or satisfy these people. It may be pointed out that these people have no proper forum to air their grievances and force the government to listen to their point of view. A substantial reduction in NSS rates could also have certain other negative consequences. For instance, some of the investors could decide to invest in land, other real estate-related ventures or convert the amount in foreign currencies in anticipation of a further rise in their value. If this happens, the reduced flow of funds to NSS could force the government to borrow additional funds from either the SBP or the commercial banks for deficit financing. The savings of the economy may also be adversely affected due to lower rates of return on NSS.

The decline in NSS rates, on the other hand, would benefit the banks and other financial institutions as they could attract more deposits by even keeping their profit rates unchanged which could help them to expand their credit base. Debt servicing liability of the government would also come down and this could narrow the overall budget deficit. Overall, however, we feel that a substantial cut in the profit rates on NSS is going to hit some of the most vulnerable sections of society like pensioners, widows and the elderly and this particular group of investors should not have been subjected to more hardships. Additionally, although the investors in NSS could now get their returns through banks by depositing their cheques issued by their National Saving Centres, it would be better if the CDNS could itself deposit their monthly returns directly to their bank accounts for greater convenience.