Savers would soon be on a lookout for alternate avenues of lucrative investment in wake of a surprise 100 basis points cut in the interest rate.
Savers would soon be on a lookout for alternate avenues of lucrative investment in wake of a surprise 100 basis points cut in the interest rate. It could discourage savers and investors from putting their money into bank accounts due to the steep fall in return on deposits, and hence lead to other investments including stocks, mutual funds, foreign currency, real estate and National Savings Schemes (NSS).
Among all investment options available, stakeholders are divided on whether now the investors pour their money into the equity or property markets. Many however are bullish about dollars. Some weigh the government and the corporate debt instruments—NSS and Terms Finance Certificates (TFCs) as profitable and risk-free investments.
The interest rate has been in decline since November 2014, falling from 10 percent to 7 percent now.
Analysts say companies are now able to borrow funds at historically low interest rates. But the savers will yield little on their saving in banks. Currently, the minimum profit rate on bank saving deposit is 5 percent. However, profit rate applicable on saving accounts will be 4 percent, effective June 1.
It means if the average consumer price index inflation rate is 4.8 percent, bank account holders will get the profit rate below the rate of inflation.
Moreover, presently, the government is charging 0.3 percent withholding tax on drawing Rs50,000 or more from banks, irrespective of whether an account holder is a taxpayer or not. The government is likely to increase withholding tax rate by 0.6 percent in the next fiscal year.
Apart from reduction in interest rates, some analysts attribute the recent episode of putting the ‘KASB Bank under six-month moratorium by the government and its amalgamation with the BankIslami to lose depositors confidence in sustainability of small banks.
“For whatever reason, after the KASB saga, depositors’ confidence on small banks is likely to erode,” said an analyst. “Despite, efforts made by the State Bank of Pakistan to protect KASB’s depositors, they will bear in mind whatever the panic they experienced when they knew that withdrawals beyond Rs300,000 would not be allowed for six months at least.”
Some analysts do not agree that bank deposits could be affected by decline in interest rates.
“Interest rates are at multi decade lows, and there will be some shift of deposits to other asset classes, including real estate and capital markets,” said Faisal Mamsa from Landmark Capital. “But it may not be substantial as bank deposits are considered very liquid and almost risk free. As, savings are put into the safest places or products that allow savers access to money at any time, depositors are unlikely to pull out money from bank account.
“Yes, the phenomenon of ‘money changing hands’ can be seen where the depositors move their money to other banks on account of providing better services,” Mamsa said.
Many market players see stock market and real estate as being favourable avenues for investors especially institutions.
“In the low interest rates environment, generally investors look at shares and property markets, NSS are likely to attract investors partially,” said Nasim Beg at Arif Habib Corp.
But another analyst said that such investments are risky, as both equity and property markets can turn volatile. Moreover, as the upcoming budget seems not so friendly for the stock markets due to likely imposition of new taxes, investors could make investments in foreign currency, mainly in US dollar.
Currently, the rupee-dollar parity is stable and hovering around 101 levels. But, it looks that the US currency will strengthen against the local unit in medium term and lead to ‘dollarization’ in the local market.
With the government bonds -- Pakistan Investment Bonds -- are now being quoted with low yields, such investment is unlikely to attract more investors particularly individuals. The yield on five-year PIB is 8 percent.
Analysts believe NSS will continue to attract deposits as banks are not keen to compete with NSS for deposits.
The government offers higher return on different NSS products ranging from 7 to 10 percent. Though, it has been observed that the government revises down profit rates on NSS instruments after reduction is made in interest rates, return will remain above the saving accounts.
Inflows into National Savings Schemes rose to Rs270 billion in July-March fiscal year 2014/15 as against Rs172 billion during the same period of last fiscal year.
However, savers are not happy with the service of the Central Directorate of National Savings. These fixed income savings are good for the pensioners.
Analysts see this is a golden opportunity for the retail investors to pour money into capital market.
Some companies have issued TFCs to meet their working capital requirements and project financing. K-Electric and Engro have issued Islamic Sukuk bonds, where they received good response from the investors. Such bond holdings attract investors as the interest pay on these savings is higher than the inflation rate. The return paid on six-month retail bonds of different companies hover between 7 and 9 percent.
Komal Mansoor an analyst believes, “the introduction of a new reference rate, which is 50 bps below discount rate or at 6.50 percent, means borrowers will effectively get to benefit by 150 bps. Considering our real rate of interest is still positive, investors will be interested in purchasing good credit quality retail bonds.”
The retail bond market remains relatively small, but it is likely to grow, as the issuers seem to generate cash from capital market rather than borrow money from banks.
The writer is a staff member
