Lukewarm sale of savings certificates

The government's reliance on domestic and foreign borrowing to bridge its budget deficits is endemic. A significant portion of the domestic borrowing traditionally comes from the banking sector and through the sale of national savings certificates (NSCs). The sale of NSCs, however, has been steadily declining over the last couple of years, leaving the government's loan target from this source unmet. As a result, increased reliance on bank borrowing is squeezing capital availability for the private sector. Interest rates on savings certificates were raised in January to make them more attractive, yet net sales of NSCs have remained negative. According to central bank data, during the July-April period of FY25, net sales of savings certificates went negative at Tk 74.31 billion, with encashment outpacing fresh investments. The reason for the slump is not hard to fathom. Inflation, economic slowdown and declining purchasing power has made savings in long-term government instruments a luxury many cannot afford. Low and middle-income families are, in fact, delving into their savings simply to stay afloat.

All this is further compounded by the procedural complexity surrounding the purchase of savings certificates. The requirement to submit proof of filing income tax returns for purchases above Tk 0.5 million has become a significant drawback for investors in NSCs. While the intent behind the rule to prevent tax dodging by wealthy individuals is understandable, its implementation has inadvertently penalised lower- and middle-income families. Many of them are forced to file tax returns simply to qualify for savings certificates, even if they have no taxable income.  The lack of user-friendly mechanisms for return filing has only worsened the situation, apparently demotivating many from investing in NSCs. Thus, even after the marginal hike in interest rates, the competitiveness of NSCs compared to products offered by banks and non-bank financial institutions is in question. Moreover, unlike NSCs, these alternatives are often short-term and offer greater flexibility in both purchase and encashment.

These are the structural flaws that the government must iron out as it seeks to make the NSCs more attractive. Of late, the Ministry of Finance has tasked the Directorate of National Savings with identifying the causes behind the slump in sale of NSCs and take up corrective measures. The decision to investigate the causes behind declining investments in NSCs is welcome.  As noted, simplifying the purchasing process, easing unnecessary conditions such as mandatory tax return submission and ensuring competitive returns would go a long way towards making NSCs a popular investment tool once again. 

Moreover, allowing savings certificates to be used as loan collateral could make a significant difference. At present, many investors are forced to encash their NSCs to meet family emergencies. If they had the option to secure bank loans against their sanchaypatras, many would not have gone for premature encashment. Banks offer loans against fixed deposit receipts (FDRs), so why not against NSCs? This is a glaring inconsistency. Given that NSCs are backed by a sovereign guarantee, it is entirely reasonable to permit their use as collateral under clearly defined conditions. So, allowing NSCs to be used as loan collateral, similar to bank FDRs, would provide the much-needed flexibility for investors facing emergencies.