KARACHI - The federal government might drain-up a modest amount of deposits from the banks and deposit with the SBP in the upcoming financial year to obtain higher return and meet debt financing triggered by heavy budgetary borrowings and fiscal pressures.    This upcoming move of the federal government has panicked the banks and stock market on Monday and the Finance Ministry has explained that it would not damage the banks by withdrawing full amount of deposits, but use a portion of deposits to get better rate of return. In the meantime, the growth in assets and liability of the sector is likely to be affected to some extent. The banking sector's cost of deposit will be increased and influence its deposit portfolio however, scheduled public & private sector commercial banks will have to offer market competitive profit rates on deposit products as well as the expected rise in the KIBOR and T-bills rates may further enhance the earning of the banking  industry by the end of calendar year 2008.       Advances growth on other hand, despite slow down in consumer lending and high interest rates, is likely to remain at 10%, sustaining mainly due to demand from ongoing projects. According to a research analyst, banks' deposit growth could face some competition from new NSS schemes, which is likely to approximate 10% in 2008, lower than 19% witnessed in 2007. The government has announced launching of 3-months, 6- months and 1-year papers of a new borrowing instrument called Government Commercial Paper has been designed to be launched shortly. In addition, NSS instruments of shorter term maturities will also be introduced. Thus, upward revision in NSS rates by 200bps and launch of new short term schemes will result in a shift of some deposits from low cost current and savings accounts to these papers. Referring to the budgetary impact on the said sector, analyst said, while tax on cash withdrawal is unlikely to have any significant implication, measures for agriculture and Rozgar Program will boost the lending appetite of the sector. Moreover, removal of NPL provisions from 7th Schedule and won't have any impact on reported earnings. Provisions for NPLs will now result in deferred tax instead of corporate tax but it won't affect the overall tax liability of banks. However, it will be negative for cash flow as banks will have to pay higher corporate tax. The imposition of additional 5% duty on fee income is likely to be passed on to the consumers, the sector profits expected to grow by 14% and 18% in 2008 and 2009. The spread of the banking sector are likely to remain close to 7% in 2008, however it is expected to fall below 7% in 2009 as impacts of monetary tightening will be in full flow. Agriculture credit disbursement has been increased by Rs30bn to Rs160bn in Budget FY09. Moreover to enhance self employment opportunities the current self employment scheme being undertaken through National Bank will be enlarged and diversified. The provisions of 7th Schedule with regards to deduction on account of Non Performing Loans (NPLs) are proposed to be deleted. From 2009 banks will move back to the old regulation on such deductions through the provisions of Sec 29 & 29A of the Income Tax Ordinance, 2001 which only allows tax deduction for debt written off and not NPLs. In the interim monetary policy statement effective May, 23, 2008, SBP increased the Cash Reserve Requirement (CRR) from 8% to 9%which is likely to drain approx. 32.5bn from the banking system. Banking spreads are expected to remain at around 7% for 2008. According to the calculations made by JS Research, the total deposits of Rs3.65tn for scheduled banks as on May 10, 2008 having 89% demand and time deposits with maturities of less than one-year. Assuming a minimum return of 10.3% (6-month T-bill rate) and keeping other things constant, this liquidity removal of Rs32.5bn would lower earnings of the banking sector by around 3% (or by Rs3.3bn) in 2008. The increase in Statutory Liquidity Requirement by 100bps to 19% will not have any major impact as most banks already maintain excess liquidity reserves. Moreover, increase in deposit rates on saving accounts (approximately 43% of total banking deposits) to a minimum of 5% is likely to increase cost of deposits for the industry by 125bps to 4.26% from previous 3%. The increase in cost of deposits by 125bps is expected to decrease after tax earnings of the banking sector by around (or by Rs29.7bn), however, the impact will be mitigated to about 10-12% by increased returns based on KIBOR as well as on investments in T-bills etc.