THE average deposit rate of banks in Pakistan from June is 1.8 per cent, while the inflation for the year ending July was 9 per cent. That means the average loss of a depositor is 7.2 per cent.
In fact, he is not the gainer for saving his money and keeping it in a bank, but a heavy loser. At the same time the bank gains by a hefty 6.3 per cent compared to the average gain of the depositor of 1.8 per cent.
Even the Defence Saving Certificates, which a buyer had has to retain for 10 years gives a return of only 9.46 per cent. So at the end of the long period, the depositor is only a nominal gainer.
All this is without adjusting the 10 per cent withholding tax on the returns from savings, though very small. A large number of depositors pay Zakat as well on their deposits which depreciates the net income from the savings.
So the bank is the big gainer; and the government is the gainer, while the depositor is the loser. No wonder Pakistan’s domestic savings rate is very low.
This is not something new, but his a long history in Pakistan, except for the few years at times when the inflation is low. No wonder Pakistan has the lowest savings rate in South Asia, while India has the highest with 24 per cent of the GDP.
The new president of the World Bank Paul Wolfowitz, while assuring Pakistan of a large financial support from the bank, wants Pakistan to raise larger resources of its own. That means the national savings have to be increased and the government has to develop policies tailored to increase the savings and not decrease them.
One of the pre-requites for that is a rule that if the rate of return on savings is below five or six per cent, that will be exempt from withholding tax.
In addition to the withholding tax, the bank comes up with its own varied charges for even small services it renders. The Muslim Commercial bank, for example, now charges Rs50 for any kind of bank statement.
While the banks pay nominal interest rate of one per cent upwards on deposits, the National Savings pays five per cent on savings accounts - that is minus the withholding tax of 4.5 per cent. But the NSS offices are so few, and there is excess of red tape there.
While the depositors get 1.8 per cent return on an average, the bank as the big gainer gets 8.2 per cent.
The average return from deposits has risen from 1.21 per cent to 1.8 per cent in June an increase of 64 basis points. At the same time, the average lending rate rose from 6.4 to 8.2 per cent in June. The difference is 172 basis points. So every time the depositor gains a little more, the banks gain a lot more as the average lending rate goes up sharply.
Clearly, there is no one to protect the interests of the small savers. In fact, the banks do not now welcome small depositors. Even for savings accounts most banks demand a deposit of Rs10,000, while some like the Allied Bank want a minimum of Rs5,000. If the deposit goes below the minimum stipulated Figure, there is a penalty of Rs200 or above for a six month period.
As a result, banks are making large profits. During the six months ending June 30, the UBL made a pre-tax profit of Rs3.6 billion. MCB’s profit in the same period exceeded Rs4 billion. The PICIC Commercial Bank reports that profits from its 102 branches increased by 127 per cent and net profit after tax by 70 per cent.
The State Bank of Pakistan does not want to intervene to reduce the lending rate or raise the deposit rate. The governor, Dr Ishrat Hussain says the competition between the numerous banks should take care of that.
In theory, he is right, but in practice instead of competition we have a kind of cartel in which the bankers have agreed on low deposit rates and high lending rates. Large profits and high salaries and prerequisites for themselves and a few other top bank executives.
The businessmen find this a very iniquitous system and demand to have a say in fixing the lending rates. They want the finance committee of the Federation of Chambers of Commerce and Industry to have a major say in this regard as high interest rates can stifle economic growth and exports.
They are not content with the role of the National Credit Consultative Committee linked to the State Bank and want to have adequate representation on it. But the State Bank is not ready to dilute its privilege, while consulting the businessmen as often as possible.
The government on its part is as helpful as possible to the banks. It has been reducing the high tax rate of the bank and has been bringing it down by three per cent year after year until it touches 35 per cent, like all other corporate entities.
Gone are the days of the small savers which was begun by the Habib Bank which invited school students to open bank accounts with a deposit of Rs1. These are the days of merry consumer banking of borrowing from banks, spending merrily and living it as long as you can repay the money later. Consumer credit runs not into thousands but in millions of rupees. The man with two many credit cards is often envied by his friends and colleagues.
While banks charged until recently interest on loan on an yearly or six monthly basis, they are now more interested in monthly rates. On a credit card it could range from two to 2.75 per cent. In addition, they charge the annual fee on the cards. But if a card holder pays his bill promptly he is the gainer by the process.
The salaries and perquisites of the top bank staff are high, while those at the bottom get the old scales. In fact a large number of the junior staff were retired through the banking reforms, as in the UBL before privatization.
President Musharraf wants to see the results of such reforms on the ground. But what we see is not what we like or what is good for the country.
A number of banks have come up to promote Islamic banking but its chiefs are not paid like Islamic bankers. They are paid high salaries like other bankers which will inflate the cost of management or reduce the profits that can be shared.
It may be alright for the US to have a zero rate of personal savings, while the national savings is much better, particularly the corporate savings. Personal savings in the US has come down from 10.8 per cent of the GDP in 1984 to zero per cent now, which some find too disquieting.
But if as the World Bank president wants Pakistan to mobilize far more resources of its own to add to the $1.5 billion of bank’s aid, it has to save more and invest more, and not spend far more and leave the country with a trade deficit of over $6 billion.
The government talks of reducing the cost of doing business in Pakistan, particularly for foreign investors. But when both— energy and money— cost a great deal, the cost of production and cost of doing business will be high and discourage investment.
Hence the FPPCI wants to have an effective voice in determining interest rates and wants to keep the export credit low.
Banking is the life blood of the economy and hence interest rates and bank charges have to be helpful to the businessmen.
And everything possible has to be done to promote larger savings and investment instead of promoting larger consumption. and what is very notable about the consumption spree in the country today is that most of the purchases are of imported items or imports assembled in Pakistan like automobiles. That is not only inflating the import bill but also depleting our foreign exchange earnings.
If, instead the purchases under the consumption spree were of locally made items, the industry could expand and employment as it ought to.
THE average deposit rate of banks in Pakistan from June is 1.8 per cent, while the inflation for the year ending July was 9 per cent. That means the average loss of a depositor is 7.2 per cent.
