If commercial banks in Pakistan had never had it so good despite the vigilance of the State Bank of Pakistan (SBP) to regulate them properly and the falling interest rates all around, it is not surprising.
Along with that, Pakistan's economic relations with the US are increasing and the US aid to Pakistan is getting larger and more varied and yet following the earlier closure of the Bank of America, the American Express Bank is closing down leaving the Citibank to shine in splendour in the US orbit in Pakistan.
Other banks, including western banks, have found this an ideal time to make quick money through various new instruments and announce large profits for its share-holders in the new environment of economic resurgence.
The first mechanism that enables them make large profits is paying very low interest on deposits of account holders and getting far higher interest rates from borrowers.
The SBP's monthly Statistical Bulletin seldom carried the difference between the average deposit rate and the average lending rate. The last bulletin says that in December 2003 the weighted average deposit was 1.55 per cent and the weighted average leading rate 7.76 per cent - a difference of one to five which is exorbitant.
The earlier rates were for June 2003, when the weighted average deposit rate was 2.08 per cent and the weighted average lending rate 7.7 per cent - a difference of one to five again.
The banks clearly are the gainers and the borrowers and depositors the losers, even more after they had paid the ten per cent withholding tax on the income and they are not paying Zakat on the meagre income.
The new instruments brought out by the banks under consumer banking are well secured loans help the banks a great deal as interest on such transactions is on a monthly basis and not an annual basis.
The SBP does not want to interfere with the banking charges and wants that to be settled through competition between the various banks, which is only very slowly increasing.
The Standard Chartered Bank charges 2.75 per cent interest on the arrears of the dues that which is not paid within a month after the transaction. If money is borrowed on the credit card a cash processing fee of Rs100 is charge for non-account - holders and account holders have to maintain a minimum deposit of Rs50,000.
Otherwise Rs300 will be detected as account maintenance charge. Then there is a cash withdrawal on credit fee of Rs500. And there is also a late payment charge of Rs350 or 10 per cent of the outstanding amount which-ever is greater. All the way the bank wins and the customer's gain is marginal. The whole process is based on compound interest and heavy penalty payments for late payment.
One foreign bank charges Rs1,200 for preparing a pay order on the basis the deposit is there for non-account holders and Rs300 for account holders, while the the PICIC commercial Bank charges Rs30 for the same facility and the Allied Bank of Rs70 for the purpose.
Foreign banks keep a small number of highly paid executives and make them work very hard, while many of the Pakistani banks employ low paid executives and still some of them make them work very long hours. There is a surplus banking expertise in the market today for the 37 commercial banks to pick up at cheap rates.
In such an environment the American Express Bank is closing as it does not have a share capital of Rs1.5 billion by December 2004 and then Rs2 billion by December 31, next year. It does not expect the profits to be large enough for such a large share capital. But the State Bank says the American bank is closing as it is doing the same in many other countries in the region.
By the end of June 14 banks were short of the capital without liabilities, of Rs1.5 billion. And they included the Hang Kong and Shanghai Banking Corporation, the Oman International Bank and Habib Bank A. G. Zurich.
These banks can either merge and become more resourceful or issue more right shares and where there are enough reserves bonus shares. But their chiefs will make a proper assessment of the prospects of their banks before enlarging their capital. And that is tied up with the economic future of the country in the near future as well.
Banks are gaining from fees from larger imports and exports. If the exports in July-October last went up by 12.3 per cent compared to the same period last year the imports went up by 37.4 per cent in the same period.
Banks also make money through floating term finance certificates TFC) on behalf of other companies and through syndicated loans for other institutions. Following the SBP policy of doing every thing possible to speed up the recovery of the economy the banks have been encouraged to come up with liberal loans. While the banks are reluctant to provide long term investment loans they are ready for well secured short term loans, which means good income.
Consumer banking and leasing services are extremely rewarding for the banks. They are making everything possible to make sure the loans are well secured while the fee they can earn is large enough.
In brief, banks have far more instruments now than ever before and are coming out with new instruments. New areas of lending include housing and construction and agriculture to which the banks have to lend Rs 80 billion to Rs100 billion this year, about which the bankers are not too sure because of the failure of the farmers' to return the loans in time and in full.
Small savers are beginning to avoid banks because of the very low interest they get from them. And the government is to make the National Savings Organization an authority instead of a corporation it had earlier proposed to make. Then it will become a kind of mutual fund, giving far better returns on deposits than the banks give now.
In the West, particularly the U.S. when the interest rates crash a borrower can raise a new loan at the reduced new rate of interest and repay the old loan at high interest.
But in Pakistan the banks insists, except in case of favoured clients that the borrower repays the old loan first and then raise a new loan for which he does not often have means. And that complicates the relations between the borrower and the bank. Which should be avoided.
The country has a very low rate of saving and that has to be boosted to mobilise investment capital. And that cannot be done by the banks which prefer short term lending and commercial transactions.
Hence the NSO in its new format must come to fill the vacuum and make large investment capital available at one end and ensure better returns to the small savers at the other. The country's future should not be allowed to be determined by commercial considerations and cash profits for the bankers alone.
