National Saving Bonds (NSBs)

The Director General of Central Directorate of National Saving (CDNS) has introduced three-years, five-years and ten-years National Saving Bonds (NSBs) with coupon rates of 12.50, 12.55, and 12.60 per cent respectively. The minimum amount of investment is Rs20, 000 with no limit in maximum amount. These bonds can be bought from all National Saving Centers up to January 25. On January 29, the CDNS would allot the bonds and then CDC would process them till February 25, following which, investors can buy these bonds from the country’s all the three stock exchanges. The first ever listed and tradable NSB last week marked the beginning of new era in domestic debt management.

Under the rules individuals, mutual funds, provident/pension/ gratuity funds or trusts can invest in the new bonds. Banks and corporates cannot.

Under the rules those investing in NSBs must have an operational account or sub-account with CDC. NSBs are open-ended instrument of investment and as such there is no specific size of the issue. The profit n NSBs is payable every six months and liable to income tax but it is exempt from compulsory deduction of Zakat. Unlike other instruments of NSS, the new bonds are not redeemable before maturity.

Since banks are not allowed to invest in the new bonds it would help the government in avoiding a buildup in its borrowing from banks and would also compel banks to improve their rate of return on deposits. And as corporates are not eligible to invest in the new bonds, there is no chance for them to borrow money from banks invests in these bonds.

Bank employee’s funds are, however eligible to invest in NSBs and these funds would hopefully make some investment in the new bonds. Pension/provident/gratuity funds of state-run institutions in particular and those of corporate in general may also part of their funds into the zero-risk NSBs that also offer reasonable rates of return.

Since these bonds are listed and tradable on the three stocks exchanges, which means the investors would also have the opportunity to earn capital gain. But at the same time, chances of capital loss would be there and as such loss would be there and such investment in these bonds would require some-expertise unlike in case of NSS.

At the time passes eligible investor becomes familiar with these bonds, the government would be able to generate enough financial resources fro domestic market and domestic savings would grow. In recent years, massive government borrowings from the SBP resulted in unmanageable inflationary pressure. It’s borrowing from commercial banks also fuelled inflationary besides crowding out the private sector’s credit requirements.