National savings giving banks a run for their money

The history of National Savings Organization dates back to the year 1873 when the Government Savings Bank Act, 1873 was promulgated. During the First World War, the British Government introduced several schemes for collection of funds to meet the expenditure. It was in this context that the Post Office Cash Certificates and during the Second World War, Post Office Defense Savings Certificates were floated. The need to setup a separate agency was felt and a National Savings Bureau was established in 1943-44 as an attached department of the Ministry of Finance of the undivided Government of India. The department was headed by National Savings Commissioner with the status of a Joint Secretary. At that time the main functions of the Savings Department were to initiate all policy matters and issue directives for the execution of policy decisions of the Central Government, and to review the Savings Schemes from time to time. Gradually, Savings Organization were established in almost all the provinces of the sub-continent with the objective of popularizing the Savings Schemes among the masses as well as to supervise, guide and control the working of authorized agents under their jurisdiction. Till December, 1971, the National Savings Organization functioned as a publicity organization and its activities were merely promotional in nature. But in early 1972, the scope of its activities was enlarged as the Central Directorate started selling II-Rupee Prize Bonds, and subsequently engaged in the operations of other savings schemes. This resulted in considerable expansion of the National Savings Organization. At present, this Organization has a total sanctioned strength of 3,377 employees in various grades
National Savings have long been criticized by banks to be in direct competition with bank depositors by offering a higher rate than what is offered by the banks. Through the government does have an appetite to pay higher, it’s this pressure from the financial sector that has restrained National Savings to reduce the differential between the rate offered the bank and those offered under various schemes. In any case, National Savings provide a rate better than market average and higher than long term investment deposits. The government is the largest competitor for deposits and the largest investor for the banks when it comes to treasury investments. The National Savings as on June 2013 had total investments of Rs1,014.9 billion of which repayments where Rs629.9 billion leaving net investments of Rs385 billion.

Of this amount, debt servicing was Rs268 billion, leaving positive cash flow of Rs117 billion, which has been the highest recorded in history. Cost effectiveness of National Savings can be witnessed from Monitory Policy prepared by the State Bank of Pakistan wherein debt servicing cost on National Savings has been reduced by 16.2 percent despite 15 percent increase in portfolio during last fiscal year 2012-13 on the contrary debt servicing in PIBs and T-Bills has been increased by 44.1 percent and 39.4 percent respectively with almost same portfolio increase.

National Savings increases and decreases profit rates based on the monetary policy stance, discount rate and the rates offered by banks. In order to remain competitive and attract deposits, rate has always been on the higher side, which helps counter inflation and pulls deposits form banks. For pensioners, investment in National Savings has been the best investment choice. The organization currently runs Defense Savings, Special Savings, Regular Income, Behbood Savings, Short Savings all of which are based on certificates. In addition, Savings account, Special savings and Pensioners Benefit accounts are also offered. Defense Saving Certificates can be bought in denomination from Rs500 to Rs1,000,000 with current rate effective January 1, 2014 of 12.26 percent. Defense Saving is a 10-year scheme. Special Saving carries a maturity of three years with profit payment semi-annually. Profit rate effective from January 1, 2014 is 11.4 percent. Regular income is initiated for people who required monthly profit payment. Denomination varies from Rs50,000 to Rs10 million. Profit rate effective January 1, 2014 is 11.88 percent. Behbood savings target people who are age 60 and above where profit is paid on a monthly basis with a tenor of 10 years. Investments can be made in denomination from Rs5,000 to Rs10 million. Profit rate effective January 1, 2014 has been 14.04 percent. Maintaining a savings account has been the oldest product of National Savings with profit rate of 7.75 percent. Special savings deposit account is a three-year maturity scheme introduced recently. Profit is paid on the completion of each period of six months. Pensioners benefit account is a 10-year maturity where profit is paid on monthly basis.

Another scheme, which is quite popular among low income groups is the Prize Bond scheme with investment of Rs100 to Rs40,000. The draws are held in major cities across Pakistan. This scheme is designed similar to that of a lottery. Those who can afford seem to purchase an entire series in hopes that name will be called in the draw. Prize bonds are as good as cash and can be sold at the bank counter or open market on spot. Similarly, they can be purchased from any bank simply by paying cash. The issue with the way National Savings is being managed is efficiency. People in general have to wait an hour or more in order to get a withdrawal or deposit. Savings centers are few which results in high consumer traffic. There is acute need to increase the number of centers, possibly use bank branches to sell all investment projects just as Prize bonds. The system needs to be such where everything is automated from records to repayment schedules with payments credited to the account online without any hassle. Consumers need be given ATM cards enabling them to withdraw cash any time. Similarly, there needs to be a mechanism where people living abroad can invest through an online portal. With Information technology, it will not be surprising if National Savings could double its deposit base in less than five years.