May 17, 2003	Saturday	Rabi-ul-Awwal 14, 1424

KARACHI, May 16: People are getting a weighted average return of 2.81 percent on their bank deposits—and bankers say it may further go down in the days to come. This low return is half a percentage points less than consumer inflation—a fact many fear would result in erosion of bank deposits in the long run.

Top bankers say banks are forced to trim deposit rates to make room for lowering lending rates in an attempt to employ rising liquidity gainfully.

Liquidity has been on the rise as expatriate Pakistanis have been sending more money back home than in the past.

According to the latest State Bank statistics (posted on its website) weighted average return on bank deposits fell in March this year to 2.81 per cent—a level 58 basis points lower than inflation. Consumer inflation or inflation measured by consumer price index went up by 3.39 per cent between July-March 2002-03.

Top bankers say rising liquidity in the banking system coupled with an expansionary monetary policy has naturally led to lower interest rates. “The interest rate dynamics are such that banks have to cut their lending rates (to employ excess liquidity gainfully),” says chief executive of Standard Chartered Bank in Pakistan Mr. Azhar Hamid. He says that an effective expansionary monetary policy of SBP has driven banks to cut lending rates and boost private sector credit. Private sector credit offtake rose past Rs 100 billion between July 2002-mid April 2003 against a revised full fiscal year target of Rs 50 billion.

Hamid says that by allowing the treasury bills yield to fall in line with the market forces the SBP has created an environment wherein lowering markup has become possible—rather inevitable for the banks. He shares the concern of the savers about falling return on bank deposits but says slashing of deposit rate is just one of the three things banks have done to bring down their lending rates. They have squeezed their intermediation cost...and have allowed their margins to fall...and also lowered the deposit rates, he says. “This is a natural mix of things to do before a bank lowers its lending rate,” he said when reached by Dawn over telephone.

Hamid said declining lending rates had cut the financial costs of the manufacturing sector and enabled it to increase production and cut the prices of their products. He cited auto industry as an example.

According to Pakistan Automotive Manufacturers Associa-tion the production of cars alone went up by 50pc in the first three quarters of this fiscal year compared to a year-ago period and sales volume soared by 43 per cent. “All this could not have been possible had the banks not made very aggressive cuts in lending rates,” Mr. Hamid said.

The weighted average lending rate of all banks combined fell to 8.26 per cent at end-March this year from the yearly average of 13.12pc recorded in the last fiscal year. In other words the average lending rate recorded a fall of 4.86pc in the first three quarters of this fiscal year. As against this the average deposit rate declined to 2.81 per cent at end-March this year from the yearly average of 4.73pc in the last fiscal year. In other words it recorded a decline of 1.92 per cent.

Thus the spread between average lending and deposit rates of all banks combined came down to 5.45 per cent at end-March this year from 8.39 per cent recorded in the last fiscal year. Senior bankers say this reduction in the spread speaks of the increased efficiency of the banking system.

But the fact that this efficiency has been achieved partly by handing the depositors a negative return or a deposit rate less than inflation—makes it painful.

Treasurers of both local and foreign banks say the average deposit rate may go further down in April-June quarter of this fiscal year. “You can see average deposit rate going down to maybe 2.2-2.3 percent by end-June,” said treasurer of a foreign bank.

Heads of banks privately admit that the average deposit rate at the current level is shockingly low for the investors—and any further fall would be devastating.

“I think that the deposit rate has bottomed out,” said head of a local bank. “And if it goes further down it will be a total disincentive for the saving public.”