NATIONAL SAVINGS

NATIONAL S SAVINGSA Comparison of banks and savings centers5

NATIONAL SAVINGS A COMPARISON OF BANKS AND SAVINGS CENTERS

AUTHOR: AYESHA FAROOQM09BBA020BBA (HONS)BANKING AND FINANCESUPERVISOR:SIR FIDE HUSSAIN BUKHARITOPIC:NATIONAL SAVINGSA COMPARISON OF BANKS AND SAVINGS CENTERS

COLLEGE:HAILEY COLLEGE OF BANKING AND FINANCE

ACKNOLEDGEMENT:

I am grateful to my supervisor sir fida hussain bukhari for his attention and guidance throughout the project work. Without his guidance and suggestions, it would have been very difficult for me to complete this project. Furthermore, I would like to thank my family and friends for all the love, support and understanding they gave me during the time of writing this project.

ContentContent3

INTRODUCTION:5SIGNIFICANCE OF THE STUDY:6OBJECTIVE:6METHODOLOGY:6LITERATURE REVIEW:6NATIONAL SAVING:6THE COMPONENTS OF AGGREGATE SAVING:7GROSS NATIONAL SAVINGS FOR PAKISTAN:9MONETARY AGGREGATES IN PAKISTAN:9CENTRAL DIRECTORATE OF NATIONAL SAVINGS (CDNS):10INTRODUCTION:10BRIEF HISTORY:10NSS FEATURES AND MOBILIZATION TRENDS:10PROFILE OF SELECTED NSS INSTRUMENTS:12RATES OF PROFITS ON NATIONAL SAVING SCHEMES:12PROBLEM OF NSS:13CONTRIBUTION OF BANKS IN NATIONAL SAVINGS:16BANKING SECTOR OF PAKISTAN:16PROBLEMS OF BANKING INDUSTRY:17STRUCTURE OF BANKS:17CURRENT PAKISTANS BANKING SECTOR:18ASSET STRUCTURE:19MARKET SHARE BY SIZE OF BANKS:19LIABILITIES:19EQUITY BASE:20Risk Assessment:21TRENDS IN DEPOSIT:22PROFITABILITY:22CONCLUSION:23CONTRIBUTION OF BANKS AND SAVING CENTERS IN NATIONAL SAVINGS:24RETURN STRUCTURE OF NSS INSTRUMENTS AND BANK DEPOSITS:24TREND IN NSS AND BANK DEPOSITS:25SAVINGS mobilized BY NATIONAL SAVINGS SCHEMES:26BANKSINVESTMENT IN GOVT PAPERS:30ECONOMY AND FINANCIAL SYSTEM WEAKNESS:30POPULARITY OF NSS:31CONCLUSION:32REFERENCES:33

INTRODUCTION:National savings means Total saving by all sectors of the economy: personal saving, business saving (corporate after-tax profits not paid as dividends), and government saving (the budget surplus or deficit). National saving represents all income not consumed, publicly or privately, during a given period.In my research I will compare the contribution of the banks and national savings centers towards national savings .whether banks contributed more in national savings or savings centers. I will do research with in the time series of years 2003 to 2013.I will do the past data analysis.SIGNIFICANCE OF THE STUDY:Source of national savings is private savings less budget deficit. And use of national savings is equal to domestic investment less investment finance by borrowings from abroad.in this context high national saving will raise future living standards whether it finances investment directly or reduces international borrowing. Because not or less national savings will reduce the domestic investment and ultimately burden of paying the interest and dividend on foreign borrowings. It is very important to find the ways to increase the national savings .and savings is mobilized by financial institutions like banks savings centers, DFIs and NBFC. By considering its importance we are going to analysis the roll of banks and savings centers towards national savings.OBJECTIVE:The purpose of this study is to examine the roll of banks and savings centers in national savings.METHODOLOGY:In this research topic quantitative technique is used. Because I have gathered the data form financial statements of different banks and national saving centers and reports of state bank of Pakistan.

LITERATURE REVIEW:I study state bank of Pakistan reports, reports of IMF, pakistan economic surveys, central directorate of national savings reports. NATIONAL SAVING:For a country, saving is defined in a similar manner: by subtracting from a countrys economy what is consumed. We subtract govt. purchases of goods and services in addition to consumer purchases(S=Y-C-G).The major component of national saving is private saving (the sum of all savings by individuals in economy).Some people save a lot, some do not save al all, and some are dissaving-that is they have negative saving. For example: when people retire they usually consume a lot more than their income they are dissaving, when people are middle-aged, their income is usually greater than their consumption they are saving. Most young people either save very little or, if they are able to borrow, they dis-save. We define private saving using the symbol T for taxes as Private saving=Y-C-T. (Weerapana-page 528-2008)THE COMPONENTS OF AGGREGATE SAVING: For this purpose it is helpful to introduce the concept of the Gross Domestic Product (or GDP), and some elementary associated national accounting relationships. The GDP is simply a measure of the country's aggregate rate of production of final goods and services over a specified period. (It is from changes in GDP that we calculate the national rate of economic growth that is so often cited by politicians). The millions of commodities included in the GDP may be classified in various ways. A widely used system of classification distinguishes between consumption goods and services, C (which includes such things as food, clothing, cars, refrigerators and haircuts purchased by households); private sector investment goods, I (which includes such things as plant and equipment and inventories purchased by the business sector, as well as residential housing purchased by households); goods and services purchased by the government sector, G; and net exports, NX (the difference between exports and imports of goods and services). We may consider net exports a proxy for the balance of current account in the balance of payments.

On this basis, then, we can represent the (real) GDP for any period as a sum of these components: (production =income) 1. GDP = C + I + G + NXThe process of production generates not only a flow of outputs of goods, but also a flow of incomes to those participating in the process. Since, in general, every dollar of production generates a dollar of income, it follows that the real GDP of a country reflects a corresponding flow of aggregate real income in that country. Thus aggregate output and income are essentially equivalent measures of aggregate economic activity. Leaving aside some refinement of detail associated with international transactions, all of the income generated in any period is attributable to the household sector, since the owners of firms (whose income takes the form of profits) are of course themselves also part of that sector. The incomes received by households may be categorized into the part that they spend on consumption goods, the part that they save, and the part that they are required to pay in taxes. Thus aggregate income may be represented as a sum of consumption (C), saving (S) and taxation (T). Bearing in mind that we can represent aggregate income by GDP, we can summaries the components of income as: 2. GDP = C + S + TNow we may combine our definitions of aggregate output and aggregate income in equations (1) and (2), to get: 3. C + I + G + NX = C + S + TThis may be rearranged as investment.4. I = S - (G - T) NXFor it defines, in the three terms on the right hand side, the sources of saving from which aggregate investment can be financed. The first is domestic private sector saving, S (that is, saving by households and business enterprises). The second is public sector saving, represented by the government budget deficit, or the difference between government expenditure and tax revenue, (G-T). The third source of saving is the foreign sector.

By the logic of our international economic relationships any net borrowing from the rest of the world implies a corresponding current account deficit. Thus our utilization of foreign saving is represented here by net exports, NX. It is important to note that, in principle, any of these saving flows may be positive, zero, or negative. It is clear now that some of the confusion about the relationship between saving and investment derives from the fact that there are several kinds of saving to be taken into account. Total saving is made up of a domestic component and an international component, either of which may be positive, zero or negative. Domestic, or national, saving comprises the saving of the private sector, S, and the saving of the government sector (G-T). GROSS NATIONAL SAVINGS FOR PAKISTAN:Gross National Savings (% of GDP) for Pakistan in year 2013 is 12.249 %. The estimates of national saving are built up from national accounts data on gross domestic investment and from balance of payments-based data on net foreign investment.This makes Pakistan No. 136 in world rankings according to Gross National Savings (% of GDP) in year 2013. The world's average Gross National Savings (% of GDP) value is 18.95 %; Pakistan is 6.70 less than the average. In the previous year, 2012, Gross National Savings (% of GDP) for Pakistan was 10.52 %. In the following or forecasted year, 2014, Gross National Savings (% of GDP) for Pakistan will be 11.82 %, which is 3.47% less than the 2013 figure.MONETARY AGGREGATES IN PAKISTAN:In Pakistan, 3 different types of monetary aggregates are in use to measure the stock of money as well as for policy formulation. These include the narrow measures M0, M1 and a broader aggregate M2.The M2 is composed of currency in circulation, other deposits with SBP, demand deposits, time deposits and Resident Foreign Currency Deposits (RFCDs) of the scheduled banks. A review of financial assets indicates that a wide range of financial instruments such as liabilities of non-bank financial institutions, NSS instruments etc., having similar characteristics like time deposits are

potential candidates to be considered for inclusion in monetary aggregates.Moreover, financial landscape of the country has undergone significant changes over the past one and a half decade. A number of new financial instruments have emerged that calls for both to reconsider the composition of the existing aggregates and define higher order monetary aggregates.CENTRAL DIRECTORATE OF NATIONAL SAVINGS (CDNS):INTRODUCTION:In Pakistan, scheduled banks, DFIs, some NBFCs and central directorate of national savings (CDNS) are the various types of financial institutions which mobilize savings from the economy but with altogether different objectives. While banks and NBFIs serve as financial intermediaries that accept deposits and channelize them to lending activities, CDNS promotes domestic savings by providing access to different types of savings instruments, with the objective of providing non-bank financing for the governments budget deficit. These institutions operate as direct competitors in mobilizing financial savings.BRIEF HISTORY:The history of the national savings organization of Pakistan dates back to 1873 when the government savings banks act, 1873 was promulgated. Since the inception of the national savings organization, this platform has largely been used by the government to mobilize funds to finance the budget deficit. During the First World War, the British government used this channel to raise funds to meet war related expenditures. Since acquiring independence in 1947, this organization remained operational in Pakistan in various forms. In august 1960, the CDNS was given the status of an attached department of the ministry of finance and made responsible for all policy matters and execution of various national savings schemes (NSS). The present structure of CDNS was set up in early 1972 under the ministry of finance. So far, CDNS has not only remained successful in promoting financial savings in the economy but has also generated requisite funds for the government to finance the budgetary deficit.

National savings schemes (NSS) offered by CDNS are sold through a network of 367 national savings centers all over the country, controlled by 12 regional directorate of national savings(RDNS).NSS FEATURES AND MOBILIZATION TRENDS:CDNS offers various non-tradable, long-term bonds, savings certificates and schemes which meet the savings and investment needs of various eligible investors, particularly the fixed income group. These savings instruments have different maturity profile, ranging from 3 years to 10 years, with varying interest rates. The government also launched the first ever listed, scripless and tradable national savings bond (NSB) on January 11, 2010 with maturities of 3, 5 and 10 years.FeaturesDSCsSSCsRICsBSCsPBA

Launched in 19661990199320032003

Maturity period10 years3 years5 years10 years10 years

Minimum holding period1 month 1 month1 month1 month1 month

Early encashment penaltyNo profit is payable if encashment before completion of each yearNo profit is payable if encashment before completion of each period of six months0.5% to 2 % of face value0.25 % to 1 % of face value0.25 % to 1 % of face value

Profit paymentsBullet bondsBi-annually Monthly Monthly Monthly

Zakat Compulsory compulsoryexemptedexemptedexempted

Withholding tax@10%*@10%*@10%exemptedexempted

Minimum investment amount Rs.500Rs.500Rs.50,000Rs.5,000Rs.10,000

Maximum investment limitNo limitNo limitNo limitRs.3,000,000Rs.3,000,000

Institutional investmentAllowed **Allowed**Allowed**Not allowed^Not allowed #

*Withholding tax is exempted if total investment does not exceed Rs150, 000

** Excluding banks and insurance companies

^only widows and senior citizen aged 60 years and above are allowed to invest in this instrument

#only pensioners of federal government, provincial government, government of Azad Jammu and Kashmir, armed forces, semi-government and autonomous bodies are allowed to invest

PROFILE OF SELECTED NSS INSTRUMENTS:As mentioned above, the most pertinent objective of establishing the central directorate of national saving (CDNS) was to mobilize private savings to finance the budget deficit. However, the highly attractive rates of return on these schemes made them a popular avenue of investment not only for the general public but also for corporate investors. The popularity of NSS instrument rose to the extent that every year the government received a net inflow of private funds from NSS, and serviced the returns, in addition to repaying the principal, from gross receipts. As a result the government did not need to separately allocate funds in the budget to service these schemes or to repay the principal when required. Subsequent to FY04 however, a change in this trend was observed, especially during FY04, when for once total repayments could not be paid through the gross sale receipts of NSS instruments. One of the main reasons for this was the ban on institutional investments in NSS instruments in March 2000, which substantially reduced their gross sales. Another major contributory reason was the linking of the NSS rates with the rates on Pakistan investment bonds (PIBs), a market-based instrument in FY00.consequently, the sharp decline in market interest rates during fy03 and fy04 impacted the rates of return on schemes as well, resulting in a diversion of private savings towards other investment options. In addition, banks were also prohibited from selling NSS instruments from June 15, 2003 in order to discourage arbitrage opportunities due to the wide interest rate differential between NSS rates and lending rates on loan secured by these

instruments. As a result, the share of NSS in total domestic debt, which had been raising untilFY03, started to decline. However the introduction of pensioners benefit accounts (PBAs) and behbood saving certificates (BSCs) during FY03 and FY04 respectively, with returns significantly higher than other NSS instruments, attracted many customers from among the people eligible to invest in these schemes. In a rising interest rate environment, as seen from FY05 onwards with a brief respite in between, the rates of return on NSS instruments have also increased, giving rise to positive inflows. The removal of the ban on institutional investment (expect banks and insurance companies) also helped mobilize savings from October 2006 onwards. RATES OF PROFITS ON NATIONAL SAVING SCHEMES:Schemes2007200820091 July20101 Oct.20111 Oct.201212 Oct.20131Jan

1. Saving accountsa. With check facilityb. Without check facility

88.50

88.5088.506.856.856.656.65

2. khas deposit accounts or certificates 3 years (rollover)a. Three years(compound rate)

13.42

13.42

13.42

13.42

13.42

3.Mahana amdani accountsa. Compound rate on maturity10.4110.4110.4110.4110.41

4.Defence saving certificatesa. 10 years (compound rates)12.15 12.6012.6811.0410.84

5.national deposit certificates/accountsa. 1 year (rollover)1313131313

6.special saving certificates/accountsa. Registered (last period of complete six month)b. Bearer (last 2 period of complete six month)12.8%15.2%12

1412.80

1413

1410.50

1410.30

14

7.regular income certificates13.3%15%1212.3612.6010.5610.37

8. pensioners benefit accounts15%16.8%14.1614.6414.4012.9612.72

9. behbood saving certificate15%16.8%14.1614.6414.4012.9612.72

Source: central directorate of national savings.PROBLEM OF NSS:For commoners, the government schemes have proved to be an attractive avenue of investment because of steady returns and minimal risk. For government, it has been a most dependable, comparatively cheaper mode of domestic borrowing and the least damaging. Leaning on the central bank to bridge the government resource gap create more imperfections. When the government needs to borrow and the citizens are inclined to invest in its savings schemes, the institution handling the business should have been a model financial organization. The Central Directorate of National Savings is far from being ideal even if the issue of rates being offered is set aside. It (CDNS) is among the most neglected organizations working under the all-powerful and seemingly most mixed up ministry of finance. Employees work like donkeys under immense stress. There are at least ten people prodding while they make entries in giant registers and calculate profits for clients. The average strength of staff at one branch is seven who handle up to 400 cases in busy branches. Many staffers of CDNS blamed their officers for their dilemma. When hundreds of millions of rupees are handled manually there is possibility of grave mistakes. CDNS is not exposed to external audits. It is humanly impossible to manage the current size of account holders without automation. In all there are twelve regions and several dozen branches all over the country. The staff strength of the organization has been frozen for the last 25 years. Over this period the total funds handled multiplied many times from Rs25-30 billion back in 1984; today total stocks of CDNS stand at 1.157 trillion. Not only this, there are various new schemes with periodical returns that has further increased the workload on staff. The problems at the CDNS cannot be resolved by the ministry of finance. There is a need for drastic restructuring and creation of a self-sustaining autonomous CDNS. The Directorate has automated 111 offices across the country while PC-1 for the phase II of computerization of National Savings (NS) centers has been submitted to the Ministry of Finance for complete automation of eight regional directorates with the installation of ATM machines.CDNS was making efforts to reduce the government's dependency on commercial banks, State Bank of Pakistan, IMF and World Bank for borrowings.In fact National Savings Organization is undergoing the process of transformation and modernization; in this regard 89 branches have been automated across the country out of total 374 branches. The next phase of computerization is under way and it is expected that by the end of 2015 all the NSCs under CDNS will be fully computerized to provide state of the art facilities/ services to our valued clients besides streamlining the operations. This will eventually lead to better planning, monitoring and reporting. CDNS, however, feels it necessary to clarify that NSS deposits are comprised of 90% individual investors. According to a departmental analysis in 2011 it was observed that only 10% investments were made by selected eligible institutions. It is worth mentioning that National Savings Organization is tapping currency in circulation especially from remote areas of the country through its network of 374 National Savings Centers all over Pakistan with the fruitful and diligent efforts of the organization besides rock-solid trust of investors. However, government is considering further expanding the outreach of National Savings Centers to semi-urban and rural areas of the country, in order to increase the real savings. It also needs clarification that the National Savings is offering subsidized rates. As per approved Government policy the rates of National Savings Schemes (NSS) are fixed @ 95% weighted average yield of Pakistan Investment Bond (PIB) of comparable maturities. According to a recent departmental study, the overall weighted average cost for NS deposit has been worked out at 9.08% per annum which is lesser then identical bonds.

CONCLUSION:The Central Directorate of National Savings is playing a vital role in the promotion of savings among the masses with more than seven million customers and a portfolio of Rs 2400 billion. It is the trust of the valuable clients that they prefer to invest in NSS for better and risk free return without any hidden charges.While NSS ply an important role in mobilizing financial savings in the economy, the outstanding stock of NSS instruments along with the unique characteristics of these schemes create distortion in the financial sector. It is suggested that CDNS is restructured in such a manner that it can continue to play its vital role in mobilizing financial savings in the economy without creating significant distortions in financial sector.To meet this objective , NSS instruments need to be integrated into mainstream capital market by making them tradable(as suggested by the SECP in its report ,and by withdrawing the implicit put option, which is a potential source of liquidity problems for the government . it is also important to upgrade CDNS infrastructure by utilizing IT services. Giving the huge size of investment in NSS, a restructured and well- equipped CDNS can be strategically used to promote outreach of financial services to remote areas.The CDNS/ Ministry of Finance is serving the small and middle class savers by introduction of innovative and customized products e.g. Short Terms Savings Certificates, Student Welfare Prize Bond, National Savings Bonds. Many new products are also in the offing to tape the untapped segment of economy. CONTRIBUTION OF BANKS IN NATIONAL SAVINGS:BANKING SECTOR OF PAKISTAN:Economic growth of a country improves because of good financial institutions. Financial institutions available in Pakistan are; commercial banks, specialized banks, national savings schemes, insurance companies, development finance institutions, investment banks, stock exchanges, corporate brokerage houses, leasing companies, discount houses, microfinance institutions and Islamic banks. They offer several products and services. In 1971, developing commercial banks in the private sector and creating development institutions was major focus of Government.The private sector development closed during the period 1971-1990, Government policy of nationalization. During this period, the banking sector came under the Governments control.The current position of Pakistans financial sector is the result of several policy shifts and developments. Like many other developing countries, Pakistan also undertook the process of financial restructuring through reforms in early 1990s to establish a more market-based system of financial intermediation and Government financing, conduct the monetary policy more efficiently through greater reliance on indirect instruments and increase the contribution to the rapid development of the stock markets. During the last few years, financial markets and institutions in Pakistan have witnessed significant changes. Since 2000, more than 40 transactions of mergers and acquisitions have been taken place within banks and between banks and non-bank finance companies. Also many banks/development financial institutions have expanded their activities into the areas where the banks previously were either not allowed or not interested. These include insurance, asset management, brokerage, leasing and other non-banking finance services essentially through separate entities. Along with financial services, various groups that control different banks have also stakes in non-financial/real sector of economy. In the World Economic Forum's Financial Development Report 2010, Pakistan has been ranked 54out of 57 countries.State Bank of Pakistan (the central bank of the country) is the sole supervisory and regulatory authority of Commercial Banks, Islamic Commercial Bank, Development Financial Institutions (DFIs), Micro Finance Banks and foreign exchange companies in Pakistan. The remaining financial institutions are monitored by other authorities, such as the Securities and Exchange Commission.Unpredicted floods and rains in the country worsened the effects of an already delicate condition of banking sector as the non-performing loans (NPLs) of the banking system grew at a faster rate during 2010.The asset base of the system also contracted over the year. The macro-environment is already questionable for the last two years or so. A host of factors i.e. slackened economic activities; power shortages, security concerns, and higher inflation have squeezed profit margins as well as the repayment capacity of borrowers. Moreover, the fiscal situation also deteriorated and the public sector borrowed heavily from banks for budgetary support, financing needs of Public Sector Enterprises (PSEs) and commodity operations.4.1 percent was the GDP growth for 2009. However, the increasing inflation is affecting the current economic situation. The economic condition has further worsened by unpredictable floods and seasonal rains. PROBLEMS OF BANKING INDUSTRY:After the independence Pakistani banking sector have face drastic changes. It faced several shortages of resources and uncertainty due political and economic instability. Lack of trained human resource and professionals resulted into poor quality of products and services. State Bank of Pakistan was formed as a central bank on July 1, 1948 to control the financial sector. Subsequent amendments were made to extend the control and functions of SBP through State Bank of Pakistan Act 1956. SBP introduced private sector to establish banks and financial institutions in the country. During the period of 1050s and 1960s unhealthy and unlawful competition resulted due to bribe and corruption.In 1974, all the existing banks were nationalized by the Government. Their performance worsened due to government protection to employees, resulting into the provision of inferior products and poor services. It also discouraged the private investors and foreign financial institutions. The bad condition nationalized banks led to privatization of banking sector in early 1990s. Today, in the growth of the countrys economy banking sector plays an important role.STRUCTURE OF BANKS:According to the State Bank of Pakistan Act, the banking system of Pakistan is a two-tier system including the State Bank of Pakistan (SBP), commercial banks, specialized banks, Development Finance Institutions (DFIs), Microfinance banks and Islamic banks.Pakistani banks provide cash services to individuals and companies, including correspondent-banking. Banks also offer domestic and cross-border remittance services to the population. Also, they provide depository services.Sector reforms have improved the financial landscape of the country, which was initiated in the early 1990s - into an efficient, sound and strong banking system. The reforms have resulted in an efficient and competitive financial system. State owned banks have now become privatized.The legislative framework and the State Bank of Pakistans supervisory capacity have been improved substantially. As a result, the financial sector has also improved. Today, almost 80 percent of the banking assets are held by the private sector banks and the privatization of nationalized commercial banks has removed the culture of bureaucracy and formed a culture of professionalism. Technology in banking sector has also revolutionized the customer services and access on-line banking, Internet banking, ATMs, mobile phone banking/ branchless banking and other modes of delivery have made the transactions easier for the customers. The Credit Cards, Debit Cards, Smart Cards etc. business has also expanded. The foreign exchange market that was highly regulated through a system of direct exchange controls over suppliers and users of foreign exchange has been liberalized and all purchases and sales take place through an active and vibrant inter-bank exchange market. All restrictions have been removed with full current account convertibility and partial capital account convertibility.CURRENT PAKISTANS BANKING SECTOR:Pakistan faced a difficult macro environment since 2007. This was not due to global recession but due to a series of factors that grew to destabilize the country's macroeconomic condition. Due to this destabilization IMF in 2008 started its stabilization program for Pakistan. The global recession had an indirect impact on the country. As mentioned above the global recession did not have a major impact due to the recession but it had a major impact on Pakistans exports. Major export partners were facing severe liquidity and trade was greatly hampered, on the other hand foreign investments in the country also reduced.

Other factors such as power shortages reduced the overall industrial capacity of the country and due to increased cost of production the prices rose, the long standing issue of inter-corporate circular debt, considerable decline in foreign direct investment due to weak economic fundamentals, high inflation, security concerns and above all, the high increase in fiscal deficit which broke all previous records in the country's economic history, major environmental catastrophe in the form of floods, all these factors contributed in weakening Pakistans economic condition.The leading evidence of these various pressures on domestic firms and industries is that their loan repayment capacity has been compromised, with a consequent rise of non-performing loans (NPLs) on the banks balance sheets.Furthermore, due to the deteriorated fiscal situation, public sector borrowed heavily from banks for budgetary support, financing needs of Public sector Enterprises (PSEs) and commodity operations. Accordingly, there has been a shift in banks asset-mix towards credit to the public sector along with increased performance for top rated corporations over Small and Medium Enterprises (SMEs) and consumer that are generally less resilient to economic slowdown and fragility in operating environment. ASSET STRUCTURE:In September 2010, the total assets of the banking system reached Rs 6.6 trillion. The increase in the asset base has been a big achievement, especially given the growth of only 8.8 percent in 2008.However; a key characteristic of this growth has been the significant increase of 60 percent in investments in 2008 and then a lowered growth of 17% in 2010. Reasons attributed to the rise include factors such as: Change in banks risk perception due to mounting nonperforming loans (NPLs) and second Greater borrowing needs of the government from scheduled banks for budgetary purposes, for settling intercorporate receivables and to finance commodity operations.MARKET SHARE BY SIZE OF BANKS:In terms of concentration in the banking sector, the share of individual banks assets in the total asset base continues to decline as the industrys competitive position gradually improves. A decline in the concentration of large banks is also evident from the fact that the market share of the big 5 banks decreased from 63.2 percent in 2000 to 50.4 percent during the year 2010.

LIABILITIES:On the liability side, banks deposit base, the biggest source of funding for banks in Pakistan, grew to reach Rs. 5126 billion during 2010. Increase in deposits is largely attributed to monetary expansion on the back of rising Net Domestic Assets (NDA) - due to substantial government borrowing - and an increase in home remittances, an important source of bank deposits.Banks on the other hand are also facing a very strong competition by the NSS (national saving scheme) due to the much higher return provided by NSS over deposits. As a result, low returns on deposits continue to hurt deposit growth. The State Bank of Pakistan is struggling to develop an appropriate response to the issue. (E.g. SBP introduced a minimum rate of return of 5.0 percent per annum on all categories of savings/PLS savings deposits with effect from 1st June 2008).However large banks due to their larger market share and higher economies of scale are striving hard to maintain an attractive return on deposits to hold on to their age old customers. On the other hand newer and smaller banks are also coming up with attractive rates of return and attractive offers to grab new customers.Borrowings from financial institutions, another key component of liabilities, witnessed a substantial growth, in sharp contrast to the small growth of 1.7 percent in 2008. In 2010, these borrowings mainly constituted of borrowings from SBP, and repurchase agreements in the inter-bank market.EQUITY BASE:Banks were now required to increase their minimum capital to Rs. 10 billion by end2010. Notably, banks minimum capital requirement (MCR) was rationalized by the SBP in 2010. The MCR was revised in view of the prevalent challenging economic environment, which had negative implications for banks profitability and consequently their reserve accumulation.

DateEquity (in billion Rs)Minimum Paid up Capital(Net of losses) Dead line by which to be Increased

2007544

2008569Rs 5 billion 31-12-2008

2009660Rs 6 billion 31-12-2009

Sep 2010655Rs 10 billion 31-12-2010

2011Rs 15 billion 31-12-2011

2012Rs 19 billion 31-12-2012

2013Rs 23 billion 31-12-2013

Source: State Bank of PakistanIt is worth mentioning that, in order to meet the MCR, banking industry in Pakistan is currently under a wave of Mergers and Acquisitions (M & As) and there are on average 3( M & As )per year. The financial liberalization which also led to a mushroom growth of banks, particularly the financially weak banks - which may cause financial instability prompted the State Bank of Pakistan to instruct all banks to improve their financial health by increasing the minimum capital requirement (MCR) from Rs. 10 billion at end-2010 to Rs. 15 billion at end-2011 and Rs. 23.0 billion by the end of 2013. The MCR requirement for DFIs was to raise their paid up capital to Rs. 6.0 billion by December 2009. This has forced banks (and DFIs) either to consolidate further by finding merger partners or exit the market.Risk Assessment:Credit riskCredit risk is risk due to uncertainty in counterpartys ability to meet its obligations. Credit risk is a major problem for Pakistani banking system. Credit risk increased in 2010 because of unstable economic situation and weaknesses in the operating environment along with devastations caused by recent unpredictable floods and rains. As a result, NPLs again grew by 7.4 percent reaching Rs494 billion. Though the decline in advances in third quarter was usual this led to a significant increase in NPLs.The major factors for decline in overall advances were the; Unpredictable floods that affected credit operations.

Risk-averse policies of banks for increase in credit risk, especially by the bigger players Due to subdued economic activity, banks became cautious in their lending business. This is visible in the shift in their advances-mix from consumer and SME to corporate especially the top-rated corporations faced a fall in advances, while several others faced a marginal growth. However, growth by latter groups does not have any significant impact due to their modest share in the system.Small banks share in advances increased in the current quarter. In both public and private sector the contraction of advances took place, mainly due to 6.5 percent decline in commodity finance over the quarter. However the energy sector saw some growth in lending to public sector corporations. Relative sharper decline in private sector shifted the mix towards the public sector advances by 20 bps. Despite the overall decline, the Corporate and Agriculture segments still managed to show some growth in advances. The performance of both these sectors in terms of share in overall loans remained relatively stable due to their scale of production, varied activity and share in GDP. The growth in Agriculture segment was led by a single bank holding 54 percent of agriculture portfolio various loan segments have shown declining trends in fresh loan acquisition due to varied reasons. The decline in commodity finance is cyclical in nature, whereas the depression in SMEs and Consumer loans resulted from low credit demand, partly due to high interest rates, high inflation and high degree of banks preference for managing existing worthy borrowers.Interest rate is another important factor of credit risk in the economy. Pakistan's official interest rate reported in November 2010 was at 14.00 percent. Therefore, the volatile interest rate alters the cost of borrowing which is linked to the repayment capacity of the borrowers. In this respect, high government borrowing, constant fiscal deficits and the rising inflation are largely to be blame for the lending rates remaining in double figures.TRENDS IN DEPOSIT:The deposits base of the banks increased by 4.7 percent from the year 2009 to 2010. Deposits of the banking system posted a strong over-the-quarter growth of 6.8 percent (YoY 13.5 percent).The banking system has been facing a strong competition from Central Directorate of National Savings' (CDNS) schemes in mobilizing deposits but flow of funds to CDNS has somewhat pacified which helped banks to attract substantial growth in their deposit base.

PROFITABILITY:Profitability is very important for the smooth functioning of the banking sector. The profitability of the banking system improved over the last year mainly due to high net interest and non-interest income Profitability of the banking system posted a gain of a (before tax) Rs 80.3 billion. In line with the increase in the profit before tax, the profit after tax of the banking sector also posted a small decline during the year 2010.Prevailing challenging environmental factors and banks increased preference for low-return, risk-free assets continue to exert pressure on banks profitability. However, high provisions and increasing administrative expenses impeded the overall profitability. The profitability, however, varies across banks. Improvement in ROA for banks with large assets base as opposed to small sized banks indicates that earning performance of the banking system is concentrated towards large sized banks with small sized banks under stress. INVESTMENTS: the asset mix of the banking system shifted towards the investments due to the ongoing economic slowdown in economy. The investment portfolio of banks particularly investments in government papers and bonds of PSEs grew significantly and took the major share of the increase in banks' asset base. CONCLUSION:The banking sector of Pakistan is growing at a very fast pace. Due to the growth and profits new banks are coming into the sector and are able to withstand this difficult operating environment. Due to new entrants the competition is becoming more intense than ever before. But still the older banks are dominating the market share.Pakistanis on the other hand have major dislike for the interest income therefore a large portion of 180 million populations does not use banking services. Other than the dislike for banking sector some of the rural/semi-rural areas are not reached by the banks. According to a world bank study on access to finance published in 2008 estimated that only 14% of the population in Pakistan uses banking services.Other than low penetration and difficult operating environment, one of the biggest challenges for Pakistan is increase in the non-performing loans and low private sector credit demand as high lending rates and weak economy is adversely affecting the borrowers payment capacity.Undergoing these economic difficulties banks faced another problem which was the heavy flooding in Pakistan during August 2010 that caused humanitarian disaster and changed the economic outlook of the country. Some researchers believe that weak economic growth is for a short run only.

Due to all these challenges, Pakistans banking industry is rebalancing its assets from advances to investment. Banks elements of credit risks are clearly visible from their inclination to invest in government securities and their preference to meet financing needs of the government rather than the private sector.CONTRIBUTION OF BANKS AND SAVING CENTERS IN NATIONAL SAVINGS:RETURN STRUCTURE OF NSS INSTRUMENTS AND BANK DEPOSITS:YEARNSS RATESBANK DEPOSITS RATES

FY039.3%2.1%

FY048.1%1.3%

FY058%1.9%

FY069.8%2.7%

FY0710.2%3.1%

FY0812.1%5.6%

FY0913.8%6.5%

FY1012.5%6%

FY1113.1%5.88%

FY1213.17%5.82%

FY1311%5.01%

The above table shows that NSS rates of return, indicating that CDNS invariably offers higher rates of returns on various NSS schemes as compared to the weighted average rates on bank deposits.In December FY00, with the objective of eliminating market distortions and moving to a market mechanism for the determination of rates, the rates of return on NSS instruments were linked with the cut-off rates on Pakistan Investment Bonds.6 PIB rates started declining from FY02-FY04, rates of return on NSS instruments started declining and reached 8 percent (average) in FY05, from 9.3 percent in FY03. From end-FY08 onwards, there have been several upward revisions in NSS rates in line with the changes in the rates on PIBs, driven by monetary tightening by the central bank.Consequently, NSS recorded historical net inflows of Rs. 250.1 billion in FY09. However, a fall in PIB rates in the brief period of monetary easing in 2009, led to a reduction in NSS rate by 283300 bps. Consequently during FY10, net flows of Rs. 185.7 into NSS were below the targeted amount of Rs. 231 billion. Subsequent to the reversal in the monetary stance from FY11 onwards, the rate of profit on these Schemes were also enhanced.Although NSS instruments do not provide inflation adjusted returns,nevertheless,their relatively higher rates make them attractive investment instruments.Notably ,NSS instruments are protected to market fluctuations in interest rates due to their non-tradable nature .Another prominent feature of these instrument is their availability on tap, and the embedded put option, which enables the investor to encash his investment and reinvest at a higher rate each time there is an upward revision in the rates of returns. The early encashment facility without any cash penalty reinforces this particular behavior. These various features of NSS instruments tend to create distortions in the financial system.

TREND IN NSS AND BANK DEPOSITS:YearsTotal bank deposits(Rs. in billion)Growth rate of depositNSS stocks(Rs. in billions)Growth rate of NSS stocksSize of NSS as % of (bank and NSS deposits)

FY03170098237%

FY04200718%9840.2%33%

FY05237718%940-4%28%

FY06278717%936-0.4%25%

FY07346124%10047%22%

FY08383211%10939%22%

FY0941208%136024%25%

FY10466113%158617%25%

FY11559920%182115%25%

FY12640314%200910%24%

FY13 731614%239619%25%

From this figure we can conclude that till FY08 there is an increasing trend of bank deposits growth as compared to NSS stocks. In FY09 and FY10, growth of NSS stocks is more than banks deposits. But in FY11 and FY12 bank deposits growth is more than NSS stocks. In FY13 NSS has shown 19% growth whereas banks deposits grew at 14%.SAVINGS mobilized BY NATIONAL SAVINGS SCHEMES:Time periodDSCRICSSCPrize bondsOthersTotal

FY05(2004-2005)-8,759.1-40,663.0-83,311.99,357.073,670.3-49,706.8

FY06(2005-2006)-7,476.2-15,329.0-57,662.13,700.282,768.06,000.9

FY07(2006-2007)-5,800.3-16,991.86,965.89,007.374,470.467,651.4

FY08 (2007-2008)-4,320.6-273.413,802.98,277.169,153.586,639.5Target (90.5b)

FY09(2008-2009)-27,441.340,094.3128,469.014,650.0111,451.5267,223.5(267.20 b) 12.5%

FY 10(2009-2010)-32,354.844,535.061,996.138,556.7112,034.8224,767.7Target (220b)

FY11(2010-2011)9,748.046,946.043,961.041,083.393,205.3234,943.7

FY12(2011-2012)7,297.043,971.6-52,834.156,324.2133,598.4188,357.1(188b) Target (146)

FY13(2012-2013)29,363.634,035.342,799.348,921.2179954.9335,074.3

(Million Rs.)Source: central directorate of national savings.FOR YEAR 2008:The currency to deposit ratio, and, M3 to M2 ratio, have been rising over the last couple of years. In particular, while an increasing currency-to-deposit ratio indicates a change in preferences toward holdings; the rise in M3 relative to M2 represents the growing competition banks face in deposit mobilization from non-bank sources, most notably National Saving Schemes (NSS).In 2008 growth rate of savings of savings center was 9% as compare to 11% growth of banks deposits. In 2008 fiscal deficit was 1.6% of GDP.in 2008 deposit rate of banks was 5.6% whereas on NSS 12.1% profit rate was offered. CDNS contribute less towards national savings as compared to banks.FOR YEAR 2009:In 2009 there was an increase growth in stock of CDNS by 24%. In 2009 fiscal deficit was 1% of GDP and government successfully financed the deficit through NSS despite dependence on banks borrowing and share of NSS in total deficit financing rose to 37 per cent, from 10.3 per cent in FY08. CNDC increased rates of profit up to 13.8% to attract the people and successfully shown a tremendous growth of 24% despite the fact that banks also increased the profit rates by 6.5% on various schemes of deposit. The move by the government of increasing profit rates on Central Directorate National Saving (CDNS) products by 170-240 bps to above 18 per cent in a bid to finance fiscal deficit hunted the banking sector's deposit growth in calendar years (2008-09) despite offering attractive returns on various deposit schemes by the banks.The commercial banks showed a decreasing growth of 8% in their deposits during 2009 period as compared to 11% in 2008. Despite global and domestic slowdown Commercial banks continued to depict growth in their deposits, assets and also earned an impressive profit in 2009 although the economy of the country was still experiencing a slowdown .Pakistani commercial banks have shown resilience and a strong potential to growth.FOR YEAR 2010:In 2010 Despite of financial crunch and shocking flood in the country bank deposit grew by 13% and NSS stock increased by 17% as compared to 2009.Relatively higher returns NSS has the capacity to hurt the deposit growth of banks. Banks weighted average deposit rates (6 percent) which remained significant. The profit rates on NSS reduced from 0.5 per cent to 1.9 percent on different schemes. The new rates on NSS components were applicable on new deposits to be attracted by the schemes from July 1, 2009. Analyzing the impact of NSS profit rates cut on banking sector, the downward revision was the complements of monetary easing. However, the government decision to finance the budget through NSS would call for relatively higher returns compared to other investment opportunities, such as government securities for corporate and bank deposit for individuals. The Govt announced 1QFY10 targets of Rs325b and Rs30b for T-bills and PIBs respectively, down by 38 per cent and 25 per cent on quarter-on-quarter basis. However, target for NSS increased by 78 per cent to Rs231b for FY10, which indicates higher reliance on NSS for budgetary financing. By end FY10, the share in deficit financing declined to 20 per cent with the decline in NSS rates. Earlier, the Federal government announced amendments in tax regulations for provisions/bad debts by allowing provisions up to 1 per cent of advances. In 2009 the commercial banks focused on consolidation of their existing business because of recession but in 2010 the banks started aggressive marketing as economy of the country moved towards recovery and growth. Consequently during FY10, net flows of Rs.185.7 into NSS were below the targeted amount of Rs.231 billion.FOR YEAR 2011:In 2011, growth of bank deposits was more than in 2010.and CNDC stocks were less than in 2010. 20% bank deposit grew and CNDC stock grew by 15%. After the government banned institutional investment in national saving schemes in April 2011.The imposition of withholding tax on financial transactions and negative real returns on bank deposits affected the deposit growth of the industry. Higher real returns, along with the security of investments in NSS instruments have provided strong competition to banks time deposits in recent years. Despite some improvements in the deposit base of the banking industry, three leading commercial banks, one from the public sector and two in the private sector, posted Rs13. 1 billion deposit reduction during July-November (FY11).That trend was widely attributed to a general shift in agents liquidity preferences, especially the government, which was away from bank deposits to other non-bank sources in fiscal year FY11. Government had witnessed unusual deposit withdrawals at both federal and provincial levels from large few banks during the last five months of the fiscal year FY11. INFLATIONARY PRESSURE:After The reversal in the monetary stance from FY11 onwards, the rate of profit on NSS schemes were enhanced. Although NSS instruments do not provide inflation adjusted returns. Nevertheless, their relatively higher rates makes them attractive investment instrument. Given increasing inflationary pressures the real rate of return on both NSS instruments and bank deposits were flying around the negative zone. The inflation is not the byproduct of banks or the State Bank. It is the government, which relied heavily on borrowing and creates inflation that ultimately deprives the depositors from real returns in this situation the real negative return on deposits and NSS badly hampered the savings in the economy. Both the State Bank and the government left the issue unresolved for many years and a never-ending borrowing habit of the government led to high inflation now crippling the economy. Despite a better return on National Saving Scheme, which was much higher than return on bank deposits, the high inflation negated the benefits of higher return.FOR YEAR 2012:In 2012, bank deposit grew by 14% and NSS stock grew by 10% which was less growth as compared to 2011. Growth of NSS and bank deposits was less than in 2011.NSS rates of profit on average were 13.17% which was higher than in 2011 and bank deposit rate was 5.82% which was less than in 2011.FOR YEAR 2013:In June 2013, banks shown a growth of 14% whereas CDNS shown an incredible growth of 19% in FY2013.In response to considerable cut in discount rate by State Bank of Pakistan, the Federal Government had downward revised the profit rates on National Savings Schemes for the investment made on or after 27-08-2012. Revision was made in the backdrop of current market scenario and in accordance with the government's policy to provide market based competitive rate of return to the investors of National Savings. As per Notification issued by Federal Government the new rates for Special Savings Certificates(R)/Account, Regular Income Certificate, Defence Savings Certificates and Savings Accounts fixed at 10.80%, 11.04%, 11.50% and 7.40pc respectively.Banks was in a better position to attract the attention of savers and enlist their deposits. The banks were more than excited 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. But Despite the substantial reduction in profits, savers continue to stick to NSS, like bees on honey. During FY13, Rs335.07 billion parked in NSS by domestic savers. Deposits into NSS have risen, whenever the gap between CPI and discount rate widened over past few months; thus offering depositors a higher real return.BANKSINVESTMENT IN GOVT PAPERS:Banks have been profitable for the last many years by just investing their money into government papers which offered the return as high as about 14 per cent. The wide banking spread has been a practice for banks as they used to keep most of their profits and pay poor return to depositors. This high profit strategy hurt banks deposit mobilization, particularly small and medium banks failed to raise money as per their requirements. A number of banks, at least nine banks, remained unable to meet the Minimum Capital Requirement. The low deposit base of small and medium banks deprived them of share in profit of the banking in Pakistan since the five big banks earn over 80 per cent profits of the entire banking industry.ECONOMY AND FINANCIAL SYSTEM WEAKNESS: Normal mobilization level of savings from NSS is fairly obvious and intuitive. Of course, this undesirable development is the result of certain growing weaknesses of the economy and the financial system and if these are not properly addressed, NSS deposits would maintain their present trend and continue to be the main source of financing the budget deficit. The government is not offering higher rate of return on NSS only on compassionate grounds, or for helping the disadvantaged sections of society like senior citizens or pensioners, but to meet the growing gap between its revenues and expenditures. It is, therefore, obvious that unless the provinces do not share financial burden as expected after the latest NFC Award, higher resources are not mobilized and expenditures shortened by the government and budgetary support from other sources is not adequately available, it would not be possible to reduce the overall fiscal deficit and lessen reliance on NSS. Another factor which has popularized the NSS among the public and attracted higher level of household savings through this source is the inefficiency of the banks to play their intermediary role properly between savers and investors. Lower rate of return on deposits due mainly to higher spreads coupled with the growing opportunity of investment in government securities at reasonably attractive rates and easy access to liquidity from the SBP has reduced the banks' incentive to mobilize higher level of savings from the economy and channelize them into productive purposes to energize private sector activity in the country. Seen from all angles, it is clear that most of the savings of the economy, which are already at a critically low level, are being used for government consumption and not utilized for financing the credit requirements of the private sector which is the principal source of promoting growth and generating employment. It is, therefore, imperative that such a negative trend is arrested as soon as possible with a view to revive growth impulses of the economy and contain future debt servicing burden of the country within reasonable limits. POPULARITY OF NSS:The total investment made in various savings products of the Central Directorate of National Savings (CDNS) has increased by Rs 249 billion from Rs 86 billion in 2007-08 to Rs 335 billion in 2012-13. during the fiscal year 2007-08, the investment target of CDNS was Rs 90.5 billion while the Directorate accumulated a total investment of Rs 86 billion. In 2008-09, the Directorate fetched Rs 267 billion against the target of Rs 222 billion. During 2009-10, the investment target of CDNS was Rs 219 billion while the Directorate gathered Rs 225 billion. During 2011-12, CDNS achieved a total investment of Rs 188 billion against the target of Rs 146 billion while for the fiscal year FY13, total investment made in its various products is of 335 billion.Popularity of NSS is pronounced especially in the absence of other viable long-term saving alternatives. Moreover, the sovereign guarantee attached with NSS attracts the risk-averse investors of Pakistan. During, February 2013 the Federal Government allowed public sector corporations and institutions to invest in National Savings Schemes, which was barred in April 2011. This encouraged trusts, pension funds, provident funds and other institutions to seek shelter in NSS, offering at least double rates than banks do. The second and third irregular growths in NSS deposits were seen in May 2012 and August 2012. Expectations of a significant reduction in the discount rate pulled savers towards NSS, especially those products under the CDNS portfolio that allow savers to lock in rates for up to a year. Deposits in Behbood and other certificates, shielded against downward rate revisions went through the roof in the corresponding period. Going forward, with interest rates likely to rebound from Jun-2013 ahead of IMF programme and CPI also likely to rebound in FY14 on the heels of weakening rupee-dollar exchange rate and a possible increase in international oil prices that will spill over on power tariffs, fuel prices and other CPI heads, participation in NSS will depend on how profit rates on NSS and real interest rates take shape.

CONCLUSION:During the last 2 years or so, State Bank has decreased the policy rate by 4.5 percent from 14 percent to 9.5 percent which has depressed the overall interest rate structure and pushed down the rate of return on bank deposits by a substantial margin. Though the minimum interest rate of 6 percent on saving and time deposits prescribed by the SBP is still intact but this is much lower than offered on various saving schemes of the government. But growth of banks deposits has increased in 2011 and 2012.The present growth in NSS deposits shows that the amount mobilized by the government through this source is Rs 335 billion during FY13 as against Rs 188 billion during 2011-12.there was a historic growth of 24% in 2009 as compared to 2008, 2010 and 2012, but in 2013 there is 19% growth in NSS deposits which is more than bank deposits. The shift of private funds from banks to national saving centers has occurred despite the fact that working conditions in the banks' branches are relatively better. This shows that depositors are prepared to undergo certain amount of inconvenience for getting a higher rate of return if overall economic environment in the country, in particular per capita income and the rate of inflation, is discouraging or deteriorating at a certain point of time. It seems that savers in Pakistan, rather than going to banks, are queuing up at National Saving Centers to earn a better rate of return on their deposits.

REFERENCES:Economic Updates - Pak Major Financial NewsState Bank Publications:http://www.sbp.org.pk/fsr/2009/pdf/Special%20Section%201%20%20NPLs%20-%20Cyclical%20or%20Structural.pdfhttp://www.sbp.org.pk/fsr/2010/pdf/2GovernmentBorrowing.pdfhttp://www.sbp.org.pk/publications/FSA/2005/Chapter_3.pdfhttp://www.sbp.org.pk/bsrvd/2010/C7.htmhttp://www.sbp.org.pk/bsd/10YearStrategyPaper.pdfhttp://www.sbp.org.pk/publications/q_reviews/Q_Review_Sep_10.pdfhttp://www.indexmundi.com/pakistan/gdp_real_growth_rate.htmlhttp://www.indexmundi.com/pakistan/gdp_composition_by_sector.htmlBlogs:http://www.defence.pk/forums/economy-development/60258-economic-survey-confirms-4-1-percent-gdp-growth.htmlhttps://www.cia.gov/library/publications/the-world-factbook/fields/2012.htmlNeed an essay? You can buy essay help from us today!Read more: http://www.ukessays.com/essays/finance/money-and-banking-report-of-pakistan-banks-finance-essay.php#ixzz2cuqBLn5thttp://pakistantimes.net/pt/detail.php?newsId=859116, Jul 2013, CEST. Welcome to the beta version of Econ Stats, the Economic Statistics Database service provided by EconomyWatch.com. International Monetary Fund (IMF)Lachlan McGregor is an economic consultant and was formerly Associate Professor of Economics, Monash University (http://www.abc.net.au/money/default.htm)Pakistan Times BusinessBusiness recorder.