October 13, 2003	Monday	Sha'aban 16, 1424

According to the latest report of the State Bank of Pakistan, the total number of depositors/account holders with scheduled banks was 28.607 million on December 31, 2002 and total amount of outstanding deposits of all types and maturities amounted to Rs1500.5 billion. The outstanding deposits of the scheduled banks have increased by 40.2 per cent in the last four years, i.e. from Rs1070.3 billion in December 1998 to Rs1500.5 billion in December 2002. The number of depositors/accounts holders on the other hand, has declined by 3.9 per cent during the same period.

The phenomenal increases in the outstanding stock of deposits have been achieved by the scheduled banks despite considerable dressing down of various deposit rates. The weighted average deposit (WA) rate has come down by 334 basis points or from 6.69 in December 1998 to 3.35 per cent in December 2002. While during the first six months of the current fiscal year W.A. deposit rate has further been eroded by 145 basis points,in real term WA deposit rate was negative by 1.6 per cent in June 2003. Along with deposit rates the lending rates of the Pakistani scheduled banks have also come down considerably during this period. For example, the WA lending rate has come down from 15.42 in December 1998 to 12.87 per cent in December 2002.

The decline in both lending and deposit rates has been a global phenomenon. For example in Japan, these rates have become almost zero while in many other advanced countries both lending and deposit rates are considerably lower than even in Pakistan. If we analyse deposit rates structure in Pakistan from December 1998, to December 2002 and the consequential behaviour of the depositors following patterns generally emerge;

* Between December 1998 and December 2002 both WA lending rate and WA deposit rate of the scheduled bank have declined. But while WA lending rate has come down by 16.5 per cent only the WA deposit rate has been slashed by a huge 50 per cent. This indicates that the poor depositors have been made the main victims of the inefficient financial sector.

* Tremendous slashing down of all types of deposit/saving rates in Pakistan should have discouraged deposit mobilisation activities of the scheduled banks. But in fact, the opposite has happened, as the total deposits of the scheduled banks have increased by an annual average of 10.05 per cent between December 1998 to December 2002, although, in the same period the number of depositors/account holders has declined by 3.9 per cent from 29.772 million to 28.607 million.

* During this period the impact of declining level of the disposable income has been more pronounced in the case of small depositors. The number of depositors/account holders upto Rs 10,000 has declined by 42.8 per cent in the past four years or from 16.237 million accounts in December 1998 to 9.280 million in December 2002. Similarly total amount of deposits of the small account holders has markedly come down by 54.6 per cent or from Rs 91.1 billion in December 1998 to Rs49.5 billion only in December 2002. This may be an indicator that poverty level in Pakistan has increased despite achievement of considerable macroeconomic stability. The small depositors are the main victims of the deposit rates decelaration.

* Number of accounts and their corresponding accruals have increased for depositors of Rs10,000 and above in December, 2002 from their respective position in December 1998. But most remarkable increases have been noted in the case of big account holders. For example, in the case of Rs one million and above, the number of accounts has increased by 31 per cent from 80,143 in December 1998 to 104,989 in December 2002. However, in the case of Rs 10 million and above the number of accounts has increased by 55 per cent while their corresponding deposits have increased , by 65 per cent during the same period. It may be another indication that the present trend of income distribution is highly in favour of the higher income groups.

* Under the present deposit rate structure only big deposit holders may be earning nominal income from their deposits with scheduled banks. While deposit holders up to Rs0.1 million have nothing to gain.

* Outstanding stock of deposits with the saving account of the scheduled banks has increased by 72.6 per cent although the number of account holders has increased by only one percent from December 1998 to December 2002. The increase in the saving deposits has been there despite a reduction of 386 basis points in the saving rate during the period under review. The number of fixed deposits/account holders on the other hand has declined by 48.4 percent and their outstanding accruals have decline by 4.3 per cent. This indicates a big shift in the depositors preference from fixed holdings to saving holdings.

Due to marked decline in the deposit rates, majority of the depositors are now inclined to keep their money in saving accounts rather than binding them with fixed account for a longer period. Depositor’s enchantment with the scheduled banks as a source of earning is fast depleting. They are keeping their money with the scheduled banks because they have very limited and more risky alternatives or may be, they are waiting for some better investment opportunities, which, nevertheless, are very scarce in the economy.

It is evident from the above observations that despite steady and considerable decline in the deposit rates with the scheduled banks people still prefer banks as their reliable custodians for holding and protecting their hard earned money. Another factor is that the importance of the banking sector as an integral and inseparable part of the modern financial system is so deep rooted that few depositors would like to opt out of the system In fact, in the past small investors had been robbed by illegal cooperative companies. This is why most of the depositors hesitate to shift their reliance to alternative sources of investment. Small depositors should not be further let down and deprived of fair return on their savings.