KARACHI - The overall deposit growth of the banking sector may remain stagnant in this fiscal as corporate sector has been allowed to invest in National Saving Schemes (NSS). Therefore with relatively higher returns NSS has the capacity to hurt the deposit growth of banks. The higher deposit cost pressure for banks is anticipated to exist due to higher NSS target for FY10, while inter-bank competition is also expected to persist for deposits on account of prevalent differential between NSS rates and banks weighted average deposit rates (7.54 per cent) which are remained significant. It is mentioned that the profit rates on NSS has been reduced from 0.5 per cent to 1.9 percent on different schemes. The new rates on NSS components would be applicable on new deposits to be attracted by the schemes from July 1, 2009. Research analyst at Invest Cap while analysing the impact of NSS profit rates cut on banking sector said the downward revision complements expectations 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. He further said during 1HFY09, banks assets growth got skewed towards investments as the recent update from SBP shows investments growth of 35 per cent CYTD (Rs349b) while advances grew by a meagre 0.2 per cent (Rs5.6b). The asset growth during the period remained heavily dependent on SBPs injection which is evident through relatively slow growth of 4.9 per cent (Rs191b) in deposits during the period, he added. Considering the slow growth of money supply, we anticipate these trends to continue in short term, at least till the sizeable foreign inflows materialise, which are expected in 2QFY10 he projected. The govt has 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 has been increased by 78 per cent to Rs231b for FY10, which indicates higher reliance on NSS for budgetary financing, he added. Earlier, the Federal government announced amendments in tax regulations for provisions/bad debts by allowing provisions up to 1 per cent of advances. As per amended 7th Schedule of Income Tax Ordinance 2001, provisions for advances and off-balance sheet items shall be allowed up to a maximum of 1 percent of total advances, subject to certification of external auditor for compliance of Prudential Regulations. Analyst said the development is expected to have a positive impact on banks profitability. However, concerns remain for banks due to weakening asset quality as provisioning in excess of 1 per cent would not be allowed to be carried over to subsequent years. As per historical analysis, incremental provisions normally remain in the range of allowed limit. However, economic slowdown has impacted asset quality significantly which can widen differentials in tax and accounting expenditures. As per amendments, 'sub-standard category shall not be allowed as expense, only 'Doubtful or 'Loss will be considered for adjustment. Total NPLs of the banking sector stood at Rs379b as of Mar-09, from which substandard constitutes only 20 per cent. Meanwhile, the Central Directorate of National Savings slashed the profit rate on Special Saving Certificate to 11.62 per cent; profit rate on Revenue Income Certificate 12 per cent. Rate on Pension and Behbood Certificates went down to 14.16 from 16.10 per cent. Profit rate on Saving Certificate was brought down to 8.5 from 9 per cent. The profit rate on Defence Saving Certificate was not reduced.