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Full Version: Tradable National Saving Bond
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THE launching of the first-ever listed and tradable National Saving Bond (NSB) last week marked the beginning of a new era in domestic debt management.

As the time passes and eligible investors (over 300,000 having accounts or sub-accounts with Central Depository Company or CDC) become familiar with these bonds, the government would be able to generate enough financial resources from domestic market and domestic savings would grow.

“But I don’t think these bonds would help in mopping up even a tiny portion of hundreds of billions of rupees circulating in the parallel economy,” said chairman of a big group of financial companies.

Top bankers expressed the same opinion adding that strict taxation and administrative measures are required to bring into the formal financial system the money floating in the informal sector.

Director General of Central Directorate of National Savings (CDNS) Mr Zafar Shaikh, however, insists that the new bonds are attractive enough to suck in part of the huge money from outside the formal financial system.

“Other instruments of National Saving Schemes (NSS) have done this and I am sure NSBs too would do it,” he said, citing a strong 145 per cent growth in investment in NSS during five months of this fiscal year as a reason for his optimism. Investment in NSS shot up from Rs40 billion during July-November 2008 to Rs98 billion plus during July-November 2009. Senior bankers say the depth to be created in bonds market through NSBs and the acceleration of the process of establishing reliable yield curves through electronic bonds trading initiated recently, should make forecasts of long-term interest rates a bit easier. They say the twin measures will help the authorities run the financial system more efficiently and make interest rate projections more precisely for formulating effective monetary policies.

In recent years, massive government borrowings from the SBP resulted in unmanageable inflationary pressures. It’s borrowings from commercial banks also fuelled inflation (though not as decidedly as the borrowings from the central bank) besides crowding out the private sector’s credit requirements.

Clearly, the government was in need of increasing the share of non-bank borrowing in the overall mix of its borrowing from internal sources. NSBs should help the government achieve this goal.

The CDNS has introduced three-year, five-year and ten-year NSBs with coupon rates of 12.50, 12.55 and 12.60 per cent. Under the rules, individuals, mutual funds, provident/pension/ gratuity funds or trusts can invest in the new bonds. Banks and corporates cannot.

The minimum amount of investment is Rs20, 000 with no limit on maximum amount. These bonds can be bought from all National Saving Centres up to January 25. On January 29, the CDNS would allot the bonds and then CDC would process them till February 25, following which, investors can buy these bonds from the country’s all the three stock exchanges.

Under the rules those investing in NSBs must have an operational account or sub-account with CDC. NSBs are open-ended instrument of investment and as such there is no specific size of the issue. In other words, investors’ appetite for these bonds would determine the amount in which these bonds would be issued. But under the rules, the government has the authority to decide how much worth of these bonds it should issue and their frequency. The profit on NSBs is payable every six months and liable to income tax but it is exempt from compulsory deduction of Zakat. Unlike other instruments of NSS, the new bonds are not redeemable before maturity.

Since banks are not allowed to invest in NSBs it would help the government in avoiding a buildup in its borrowing from banks and would also compel banks to improve their rates of return on deposits. And as corporates are also not eligible to invest in the new bonds, there is no chance for them to borrow money from banks and invest in these bonds.

In the past, allowing corporate investment into high-yield NSS had encouraged them to borrow funds at low rates from banks in early 1990s and place them in NSS to earn big spreads. That had led to reduced focus of the corporate sector on their core business besides expanding low-return assets of the banking system.

Bank employees funds are, however, eligible to invest in NSBs and senior bankers say these funds would hopefully make some investment in the new bonds. Pension/provident/gratuity funds of the state-run institutions in particular and those of corporates in general may also park part of their funds into the zero-risk NSBs that also offer reasonable rates of return.

“An added advantage of these bonds is that they are listed and tradable on the stock exchange, which means the investors would also have the opportunity to earn capital gains,” pointed out a treasurer of a big local bank.

“But at the same time, chances of capital loss would be there and as such investment in these bonds would require some expertise unlike in case of NSS.”

Managers of mutual funds view NSBs as a good avenue of investment for funds under the present market conditions where the return on equities is not so attractive and activities in Term Finance Certificates (TFCS) are limited. “But given the fact that normally mutual funds offer 12-17 per cent return to their investors, it makes little sense for them to invest in long-term NSBs offering 12.5-12.6 per cent yields,” remarked head of a large mutual fund.

Stock brokers say treasury bills and Pakistan Investment Bonds which are also eligible securities for calculating statutory liquid reserves of banks and are more popular in the secondary market would continue to attract mutual funds even after the launch of NSBs, which are not SLR eligible.

Though the government officials appear upbeat about the NSBs becoming a popular investment scheme for lower and middle income groups channelising part of the idle money in the economy. Senior bankers think otherwise. “Those who keep some money under the pillows do this to have easy access to cash. That is why they do not invest in NSS. I think they are not going to invest in NSBs as well,” said treasurer of a local bank.

But DG CDNS Mr Zafar Shaikh says the yields on NSBs are higher than on NSS of similar maturities and as such these should attract even those investors who have never invested in NSS. Against 12.5 per cent return on three-year NSB, the return on the similar maturity of NSS is 11.6 per cent. Similarly, the 12.50 and 12.60 per cent return on five-year and 10-year NSBs are a bit higher than 12 and 12.15 per cent return offered on five-year and 10-year instruments of National Saving Schemes.

Mr Zafar Shaikh says the government is also planning to appoint market makers from amongst the stock brokers who would be quoting two-way prices of NSBs once trading starts. “We want to appoint market makers to ensure proper marketing of NSBs.”

He says he would soon have meetings with banks having overseas branches to facilitate overseas Pakistanis and foreigners to invest in the new bonds. He declines to quantify the amount of money the government is expecting to raise through NSBs in the first issue adding that, CDNS has so far received a good response and the actual amount of subscription would be calculated on January 26.

http://www.dawn.com/wps/wcm/connect/dawn...g-bond-810
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