April 5, 2003	Saturday	Safar 2, 1424

KARACHI, April 4: The weighted average rate of return on bank deposits has fallen below inflation rate. The latest State Bank statistics posted on its website shows that the weighted average deposit rate of all banks combined fell to 3.21 per cent in January and to 3.04 per cent in February 2003 from 4.02 per cent in July 2002. Meanwhile consumer inflation or inflation measured by consumer price index stood at 3.53 in January and it remained intact in February also.

Heads of banks maintain they had to cut the deposit rates to make room for lowering the lending rates. The weighted average lending rate of all banks combined fell to 9.95 per cent in January and to 9.36 per cent in February 2003 from 12.17 per cent at the start of this fiscal year in July 2002.

The fall of the average deposit rate below inflation is bound to erode the deposit base of the banking system after a lag of time but banks seem confident that this may not happen right now.

“The reason is that the system has been flushed with liquidity primarily because of ever-rising inflow of foreign exchange into the country and that may continue,” explains treasurer of a local bank. Secondly people do not have too many choices available for saving surplus money.

“But surely the crash of deposit rates may drive some groups of the savers out of the banking system,” fears another senior banker. Bankers admit that they have lowered their deposit rate to make room for slashing lending rates. But they say that what makes the weighted average lending rate too low is that the State Bank also includes zero-rated current deposits in calculating this rate.

“If the current deposits are excluded then the weighted average lending rate would certainly rise and it may not remain below inflation rate,” says head of a big local bank.

Whereas the general public feels the pinch of the ever-falling deposit rates top bankers take pride in the fact that they have managed to reduce the spread between average lending and deposit rates. They admit that the deposit rate has fallen in the process but point out that the fall in the deposit rate has been much lesser than the fall in the lending rates. Let the figures speak for themselves: The average deposit rate has recorded a fall of 0.98 per cent between July-February 2002/03 (coming down to 3.04 per cent from 4.02 per cent). Against this the average lending rate has witnessed a decline of 2.81 per cent (falling to 9.36 per cent from 12.17 per cent).

Thus the spread between weighted average lending and deposit rates has also come down to 6.32 per cent in February 2003 from 8.15 per cent in July 2002. Bankers claim this is no mean feast.

Central bankers say since the spread between the lending and deposit rates is a good yardstick of judging the performance of the banking system the banks seem to be heading in the right direction. “But they need to reduce the spread further,” says a senior central banker. “That is why you see that the SBP has so far made no attempt to stabilize falling treasury bills yield though the banks have repeatedly ask for it.” The central banker said SBP wants the banks to learn a lesson from the falling T-bills yield and search for fresh avenues of lending and exploit the existing ones more efficiently.

Group-wise analysis of lending and deposit rates show that the state-run banks (Habib Bank and National Bank) still run a high spread between the lending and deposit rates i.e. 7.2 per cent. Officials link it mainly to the fact that state-run banks are still burdened with large non-performing loans and they are still over-staffed. The executives say the reason why average deposit rate of the two banks combined look very low is the fact they maintain more of current account deposits of government employees than other banks do.

The spread between the lending and deposit rates of privatized banks stood at 7.66 per cent in February this year — the highest among all groups of banks: their weighted average lending rate stood at 9.89 per cent and weighted average deposit rate at 2.23 per cent — again the lowest among all groups of banks. Officials of these banks say the placement of recently-privatized United Bank in this group had an impact on the combined lending/deposit rates of the group. The UBL like other state-run banks was faced with the problems of over-staffing and large non-performing loans before privatization.

So far the deposit rate is concerned local private banks stand out among all groups of banks. The weighted average deposit rate of all local private banks combined stood at 4.22 per cent — well above inflation rate in February this year. Their average lending rate was 9.54 per cent. So the spread between the lending and deposit rate was also quite low i.e. 5.32 per cent. Foreign banks reported a little higher spread between their average lending and deposit rates that stood at 7.86 per cent and 2.31 per cent in February this year.