KARACHI, July 3: Banking depositors got 250 per cent less profit than what banks kept for themselves during the first five months of the calendar year. The latest data of the State Bank showed that the average banking spread was 7.34 per cent during January-May 2006 but the return to the depositors was just 2.77 per cent. The highest return was 2.91 per cent in May.The banking sector, which was the real driver of stocks during the just-ended financial year 2005-06 and booked record profits, denied sharing profits with the depositors as the banking spread remained wide. Despite a steep rise in lending rates during the fiscal year 2005-06, the depositors got lower returns than the prevailing inflation rate. The banking spread slipped in May.

While the whole nation is stressed for high inflation, the banks are not ready to pass on benefits to the depositors who basically finance their profits.

Both bankers and analysts see no chance for a better return to the depositors in the near future. They say if the SBP raises interest rates, the depositors could get a better return. However, the bankers said the depositors could improve their return if they engage their money for a longer period but their weak economic position might not allow them to do so.

The government has reduced tax on banks’ profits and brought the tax rate on a par with the corporate sector. Now the tax rate is 35 per cent for the fiscal year 2006-07 as against 38 per cent last year. The reduced tax rate would further increase profits of the banks but there would be no raise in return to the depositors.

The lending rate has witnessed a steep rise during the past 12 months and public and private sector banks have been charging it in the range of 12 to 16 per cent. The growth in small and consumer financing is another area that brings the highest return to the banks. The share of consumer financing has increased to 21 per cent of total advances.

Banks have been making rigorous advances to earn maximum but it pushed the advance-to-deposits ratio to 76 per cent and it happened despite higher interest rate and a tight monetary policy pursued by the State Bank.

This high rate of advances also attracted the World Bank’s attention which recently cautioned the banks against high consumer advances and advised them for quality loans. So far the banking industry did not come out with rate of recovery from this sector.

Economists have been severely criticizing the banks’ consumer lending policy. They argue that the consumer financing has pushed the general public to live beyond the means. The consumers are spending more than what they earn.

“I can see a sudden breakdown in the banking industry, as at least 50 per cent consumers of the banking sector have no capacity to enter consume luxuries being offered to them,” said the owner of Hussain Corporation. He owes a big electronic shop and provides consumer items with bank guarantee.

However, the banks see no serious problems in consumer banking which is obvious from the continued campaign to attract borrowers for consumer financing. The government encourages consumerism, which it believes, accelerated the economic activities and helped achieve higher figure of GDP.