Effective from October 12, 2012, the government has once again reduced the profit rates on National Savings Schemes (NSS) in response a recent 0.5 percentage points cut in the discount rate by the State Bank. According to the announcement made by the Central Directorate of National Savings (CDNS) on 11th October, the rate for Special Saving Certificates has been reduced to 10 percent from 10.80 percent per annum while the rate on Regular Income Certificates lowered from 11.04 percent to 10.56 percent.
The rates for Defence Saving Certificates and Savings Accounts have been slashed from 11.50 percent and 7.4 percent to 11.04 percent and 6.5 percent, respectively. The rate of return on specialized savings schemes - Bahbood Saving Certificates and Pensioners' Benefit Account - have also been revised downwards and refixed at 12.9 percent. Comparatively higher rate of returns on these schemes was meant to provide a degree of relief to certain segments of society.
A cut in the NSS rates, it may be mentioned, was not unexpected. The range of downward adjustment was also, more or less, known beforehand. This was obviously due to the linkage of change in the State Bank's policy rate to the revision in rates on NSS. The government had already reduced profit rates on NSS in August this year by a substantial margin, following a cut of 1.5 percentage points in the discount rate by the SBP earlier in the month.
The second cut after only about 8 weeks would definitely be a bad news for individuals and households who were looking to invest their savings in the NSS, considered to be the safest avenue, and hoping to get a reasonable regular income to meet their requirements. Reduction in rates on NSS would reduce their disposable income in nominal terms as well as real terms and would certainly be painful at a time when inflationary pressures are still very much entrenched in economy.
The bankers, however, would certainly be pleased by the announcement. Since both the banks and the Directorate of NSS compete in the field, though for different reasons, to mobilise higher deposits from the same groups of population, banks would now be in a better position to attract the attention of savers and enlist their deposits. This would enable them to enlarge their lending activities and earn more profits. No less happy would be the government.
The State Bank's policy to reduce the discount rate has enabled it to lower the NSS rates and contain its debt servicing liability. The argument that a reduction in the rates on NSS could deprive the government of a reliable source of financing the budget to a certain extent is not valid in the current situation. The experience suggests that investors in NSS are not likely to shift to other sources of investment due to a reduction in rates on these schemes for a variety of reasons.
Moreover, the banks are more than eager to compensate for a shortfall in investment in NSS, if any, and meet the government's budgetary requirements in order to make more money from risk-free assets. All in all, the present reduction in the rates on NSS would hurt investors financially but was necessitated by the recent decision of the SBP to lower the policy rate and would be welcomed by banks and also benefit the government. Lowering of rates could also adversely affect the saving rate of economy but its net impact could only be marginal due to the overwhelming influence of other factors on the savings of economy at the moment and the size of the cut which is small.