Changing fortune of savings tools  

Changing fortune of savings tools   

The national savings scheme (NSS) instruments have been in the centre of discussion in recent months, mainly for their higher yield rates and consequent abuse of the facility.

Economists, bankers and capital market players wanted the government to trim down the yield rates of savings tools. However, their suggestions came from varying perspectives.

 Economists demanded the cut in rates, primarily to eliminate the distortions that the high yield had created in the financial markets. Bankers wanted the rates to go down for the same was discouraging savers to put in their money with banks that were offering much less as interest on deposits. Bourses, brokerage houses, asset management companies and relevant others felt that high yield rates offered to buyers of savings tools encouraged the potential investors to stay away from the stock market.

The government has no reason to oppose the contention of the proponents of cut in rates of the savings tools. Yet it is in a double bind. The Ministry of Finance cannot overlook the interest of small savers, retirees, elderly people and women who find the instruments very helpful as far as meeting their regular living expenses. Besides, within the government leadership and the bureaucracy there are people who are strongly in favour of keeping the yield rates at high level.

The Finance Minister has on occasions in the recent past promised a cut in yield rates, but he is, apparently, facing resistance from within as the rates are still intact.

Lately, the National Board of Revenue is reportedly considering taking the savings tools out of the list of investments that are eligible for tax rebate facility. The NBR is planning to do so because of the propensity among a section of taxpayers to invest in government savings tools in the month of June and en-cash the same following submission of their tax returns. Obviously, such investments are made to avail of the tax rebate facility only. Though such an action on the part of taxpayers concerned is not anyway illegal, it highlights a sort of fraudulent attitude.

But the number of taxpayers taking recourse to such a practice is unlikely to be too many since buying and disposal of instruments also involve some hassles. Withdrawal of the tax rebate facility for investment in savings tools, thus, may be viewed by taxpayers as an unfriendly act directed towards them.

Barring the issue of impact of high yield rates on the financial sector, there is an allegation of substantial investment by the affluent section of people in savings tools. The problem can be largely resolved, if not fully addressed by putting in place a few appropriate measures. A number of recommendations, including preparation of a national database of investors and mandatory submission of tax identification number (TIN), were made by different quarters. Apart from the preparation of the database by the National Savings Directorate (NSD), nothing has been done until now to check investment by the affluent section of people in the savings tools.

It, however, deserves a mention that all the demands from bankers came some months back when their industry was awash with liquidity and deposit rates were very low. The situation has now completely changed. The banking sector is now in the midst of a liquidity crunch. But not many people are aware of the actual reason for the liquidity shortage. It is suspected that a substantial volume of fund has flown out of the country, primarily through external trade transactions in recent months.

Banks have already raised their deposit rates to attract funds and the trend is likely to continue in the month ahead. The interest rates might even surpass the rates of yield offered to investors in the government savings tools. The development might trigger a reverse flow of funds - from savings tools to time deposits with banks.

The government had borrowed far less than the targeted amounts from the banking system during the last one and a half years because of substantial sales of savings tools.

Under the prevailing circumstances, the government might find it difficult to borrow any notable sum from the banking system. In such a situation, it may have to borrow more through savings tools at existing or even higher rates. Much would depend on future deposit rates of banks. 

One cannot, however, overlook the financial burden that the government has to shoulder in terms of paying the profit to the holders of savings tools.

The objective behind introduction of savings tools was to help meet, partly, the resource gap faced by the government in bankrolling the national budget and providing some financial assistance to elderly people, women and retirees. Discontinuation of the facility would result in great difficulty for the latter group of people. However, there should be some effective mechanism in place to stop the alleged abuse of an otherwise welfare facility. If the government is really serious, finding a mechanism would not be very difficult.

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