KARACHI: Trust is central not only to relationships based on love. Trust is the byword for banking as well! Most people keep money with the banks of their choice because they have trust in them. If the returns on their deposits do fall, they do not rush to withdraw their savings. They keep waiting. They do this in the hope that things will change for the better.

More than 28.8 million depositors in Pakistan also show an excellent understanding in dealing with banks. They have been getting humiliatingly low returns on their deposits but are waiting for better times to come. Institutional depositors have, however, been shifting their accounts from one bank to another and from banking to non-bank areas of investment including stock market and real estates.

But small savers continue to suffer in silence. Banks have been offering a negative rate of return on deposits for quite some time. More disturbingly, they have structured their deposit rates in a manner that offers higher return on larger amounts of savings. This does have an economic sense but it contributes to the widening of the gap between the rich and the poor. Besides, it makes the job of money swindlers easier. Frustrated at getting highly negative returns from banks, people fall prey to so-called investment and saving schemes, regardless of whether these are fake or genuine, and whether they really offer higher returns.

Just to have an idea of how much profit banks are offering on bank deposits see Table I. The table indicates that banks have generally offered a negative or lower-than-inflation return to their depositors during the first half of this year. The returns were much lower than year-on-year increase in inflation from January to June 2004. The rates of return were even lower than the average inflation of 4.57 per cent in the entire fiscal year 2003-04.

Table II shows year-on-year consumer inflation or inflation measured by the Consumer Price Index in each of the first six months of this year. As the table shows, minimum inflation was 4.31 per cent in February and maximum 8.45 per cent in June. The rates of return on even one-year fixed term bank deposits offered between January and June this year did not come closer to these figures.

But bankers argue that it is simply not possible for them to offer inflation-matching returns to the depositors when they are lending below the inflation rate.

Now this is where the State Bank's monetary policy comes into picture. The central bank has been following a lax monetary policy since November 2002, which has resulted in the gradual lowering of lending rates by the banks, thus facilitating the economy to grow faster. But banks reduced their deposit rates too aggressively to cut lending rates. Many of them failed to reduce their overall cost of operations in a big way; very few shared a larger portion of their profits with depositors. For them, earning higher profits and distributing the same among the shareholders was more important than handing out higher returns to their depositors. This thinking keeps the gap between average lending and deposit rates at a level, which is higher than desired, though far better than in the previous years. See Table III for weighted average lending and deposit rates of banks in the first six months of this year.