September 13, 2003	Saturday	Rajab 15, 1424

KARACHI, Sept 12: The levy of service charges by the banks on what they call non-remunerative accounts is causing difficulties for small account holders.

Both local and foreign banks recently warned their customers that they would deduct from their accounts a certain amount as service charge if the minimum balance in the accounts fall below a specified level. The customers are required to keep a minimum balance ranging between Rs5,000 per month to Rs50,000 per month — the amount varying from bank to bank. The service charges also vary from Rs50 per month to Rs300 per month — depending upon the size or status of the bank.

This has perturbed the private sector salaried people and many others whose monthly income is small and they cannot leave even Rs5,000 in their bank accounts just to keep them operational. The irony is that even those people are required to keep a minimum balance of Rs5,000 whose monthly income itself is less than this amount.

The problem is so pronounced that letters to editor column of newspapers including Dawn are receiving hot-worded complaints against this action of banks: people have even sought State Bank intervention into the matter.

Just to have an idea of how many people would be hurt by the banks decision to deduct service charges one has to look at the number of total bank accounts having less than Rs5,000 balance.

According to the State Bank statistics more than four million bank accounts out of total 28.6 million were worth below Rs5,000 at the end of 2002. Of this 891,838 bank accounts were worth between Rs4,000-Rs5,000. But one should keep in mind that many of these accounts have already become non-operational for various reasons — and that a good number of them are multiple accounts of the same people. And since the employees of government and semi-government organizations; students and widows etc. are exempt from the levy of service charge the actual number of affectees would reduce — but even then the number must run into hundreds of thousands!

In July this year the State Bank allowed banks to levy service charges on all types of PLS deposits provided these are indicated in their half yearly schedule of charges. Earlier in March 2001 the central bank had stopped banks from levying service charges on non-remunerative deposit accounts and accounts opened on profit and loss sharing basis. What made the SBP reverse its policy was that banks had told it that if they did not levy service charge on non-remunerative accounts they would incur losses. “In the low interest rates environment when interest- based income of banks is falling banks have to look for ways to increase their fee-based income,” said a senior official of National Bank. He was asked by Dawn why banks found it necessary to levy service charges on what they call non-remunerative accounts.

The fact that money kept in all bank accounts — whether big or small — is taken as a whole when it comes for employing funds by the banks poses a key question: How a bank account becomes non- remunerative at all? “When the cost of maintaining accounts is higher than what the bank earn on them they are treated as non- remunerative accounts,” says Mr. Khan.

He is not the only banker to say so. Bankers generally tend to take into account the service they have to provide to the account holders — and the size of the accounts — in deciding the rate of returns on the bank accounts. A thumb rule is that the larger the size of deposits — and the longer the tenure — the depositors are more likely to get higher profits: the lower the smaller the size of deposits — and the shorter the tenure — the depositors are more likely to get lower rates of return.

Besides bankers also argue that maintaining current accounts and saving accounts is sort of a service the bank provides to their customers. “This service has a cost...from book keeping to counter services and all that,” says head of retail banking at a privatized bank.

But a million-dollar question is what can be done for those whose income is so low they cannot maintain even as small a balance in their account as Rs5,000?

“One way out could be that...the organizations they work for issue them cheques for encashment at the bank counters instead of transferring money in their accounts,” suggests NBP’s Shahid Anwar Khan. Does this offer a practical solution of the problem is an issue to be looked into by the economic managers of this country.

But since the country is moving towards documentation such a practice might lead to malpractice including tax-evasion and money laundering by most employers.

MARKET FORCES: The problem arising out of levying of service charges has its roots in Pakistan’s efforts to reform banking sector and make it more market-based.

Interest rates have been on the fall for more than two years as the country has made its banking sector market-oriented and interest rates have become market-driven. The benchmark six-month treasury bills yield has fallen by a huge 4.63 percentage points within the last fiscal year pulling down in its wake both the lending and deposit rates of banks. That has reduced the interest -based income of the banks. “It would be unfair to allow interest rates to be market-driven (thus resulting in lower interest-based income for the banks) and stop banks from levying service charges to increase fee-based income,” argues a senior banker. That is perhaps why the SBP has permitted the banks to levy service charges on non-remunerative accounts.

A senior central banker said while granting this permission SBP has safeguarded the interests of small account holders by exempting the employees of government/semi-government organizations including pensioners; students and Mustahiqeen-e- Zakat i.e. all those who are entitled to getting Zakat under Islamic law — the last category covering widows and poor people.