While the World Bank underscores the fact that profitability of banks in Pakistan is very low, the millions of savers in Pakistan have been protesting that they are being paid very low returns on their deposits in banks.

And that is certainly a constantly falling rate in these times when the government is taking determined steps to reduce the heavy debt burden and lower the cost of debt-servicing by cutting the interest rates of banks as well as national savings schemes all round. When the interest on domestic debt is as high as Rs192 billion, and the total cost of debt-servicing is Rs290 billion, such harsh measures may seem imperative.

The issue of interest rates has come to the fore again following the cut in the State Bank of Pakistan’s discount rate, the rate at which it gives short loans to banks, by 1.5 per cent to 7.5 per cent. And that has followed the four cuts made by the central bank between July, 2001 and January this year, which reduced the discount rate by a total of 5 per cent, which is indeed a very large cut for Pakistan which moves too slowly and all to cautiously in such areas.

Following such measures ,the State Bank has cut the six monthly rates for treasury bills by 1.53 per cent to 4.84 per cent. In spite of that cut the State Bank received offers of Rs68.7 billion against the Rs25 billion it had wanted and that means plenty of money is available even at that low rate in a market with plenty of surplus funds.

The governor of the State Bank, Dr Ishrat Husain, now wants the banks to lower their lending rates which now average a high 11.8 per cent, as he says. Exporters who have to compete with the exporters of the world with their low interest rates as well as the industrial investors in Pakistan need cheaper loans or lower interest rates for the economy to pick up its momentum of growth and achieve the targeted growth of 5 per cent next year from the current year’s 4.5 per cent growth, as expected.

Central banks around the world are forced to cut their discount rates after the federal reserve of the US brought down its fund rate to 1.25 per cent, which is an all-time low for many decades. And that has made many countries to follow suit, particularly when banks in Japan have almost done away with their interest rates or giving loans at nominal rates to revive the all too slow moving economy.

And now Dr Ishrat Husain, not content with ad hoc policies in the monetary area, proposes to come up with a detailed ‘monetary policy outlook paper’ in December that would determine the direction of the monetary policy in the months ahead, he says.

The government wants interest rate cuts all around not only to lower its debt burden and reduce its debt servicing cost but also, as it has argued, inflation has come down to 4 to 5 per cent. But that is not the market experience of the people, particularly the middle income groups, which have been finding it tough to make both ends meet.

Pensioners, widows and others who supplement their income with the returns from their savings, find they are hit hard by the falling interest rates which had gone down to four per cent on savings accounts and then raised to six per cent by many banks. The rising cost of POL, power and other utility services increases the financial pressure on them.

Inflation in recent months or years is not as high as it used to be when we had double digit inflation continuously. But the price level we have now is the result of the accumulated inflation of over 30 years. And the hope the falling exchange rate of the dollar against the rupee can bring down prices of imported goods has not materialised. Instead the exporters are complaining against the stability of the rupee or falling exchange rate of the dollar. They would like to see the rupee going down and the dollar up so that they can get more rupees for each dollar of their exports.

The government should instead help the exporters by lowering the cost of production through cheaper energy and easy credit. But while efforts are being made to make the credit cheap, the energy cost has been rising.

The banks have several apparent reasons to charge high interest rates on lending and offer low interest rates on deposits, and keeping the inter-mediation rate at around 6 per cent or more, making both the borrowers and depositors to lose, instead of 2 per cent.

To begin with, there is the high taxation on banks, about which the World Bank and the Asian Development Bank have been complaining. The banks chiefs used to say the total is 70 per cent tax, including income tax, and provincial and local taxes. But within the last two years the income tax has been reduced to 50 per cent from 60 per cent, and the government has promised to bring that down to the normal corporate rate of 35 per cent which may be a slow process unless the government’s budgetary deficit comes down substantially.

The government had come up with extra heavy taxation on banks as permitting a bank to be set up, was regarded a licence to print money, but for a long time now the banks have been running into heavy losses for the right or wrong reasons. And the heavy tax rate has added to their burden.

The banks are also affected by the non-performing loans of around Rs250 billion and defaulted loans of around Rs150 billion — loans due for over a year in amounts exceeding Rs1 million and more.

The large staff and their poor productivity have also reduced the profitability of banks. But now a good number of them have been retrenched or given the not so golden hand-shake. And yet the surplus staff in many banks seem to be quite heavy.

Pay scales and perquisites of senior bank executives in some banks have been too heavy, and totally unwarranted by their performance or output. Paying a few top persons very high salaries and over-generous perquisites will not make the banks very efficient and more profitable. Such abuses need to be checked to avoid heart-burn at the lower levels of the banking hierarchy.

So more banking reforms and rationalization of the pay and perquisite structure are very essential instead of oligarchies ruling the roost in some banks. The State Bank is well advised to undertake a study of this problem before the essential reforms can be formulated.