October 09, 2006	Monday	Ramazan 15, 1427

IN a country with low savings and an inadequate investment rate, there is too much emphasis on promoting abundant consumer credit for the affluent.

The fight against the persistent inflation -between 8-11 per cent- demands that the currency in circulation comes down and eases the pressure of demand on goods and services and eventually reduces the prices.

Instead, a liberal bank credit policy is being pursued for consumers as opposed to investors for whom not enough credit is available from the reluctant banks. The consumer and trade financing pushed credit to the private sector in last financial year to Rs400 billion.

A small dent in the credit growth in the name of the tight monetary policy by the State Bank of Pakistan (SBP) has little impact on inflation and its beneficial effect may take a long time to be felt by the consumers.

Banks are now making 60-100 per cent profit as they charge very high rates for short-term lending and pay too little interest on savings deposits.

In fact, banks get 3-4 times as much for their advances as they pay to the depositors. According to the SBP’s Statistical Bulletin for September, the net weighted average of the interest on advances is 10.17 per cent, while the net weighted average rate of interest on deposits is 2.57 per cent.

And when it is a savings account, all kinds of charges are added to it, apart from the 10 per cent withholding tax on its return and Zakat of 2.5 per cent on the capital amount. In fact, the total of such charges is higher than the income from the savings deposits, providing no incentive for savings or savings deposits, unless they be the long-term deposits.

On this basis, adjusted for inflation the saver is the loser as his savings are eaten up by banks and the government.

The SBP’s policy is not to prevent either high rate for lending or low rates for depositors, but let the competition between banks bring the rates to the right level. But in reality while the number of domestic and foreign banks is very large, there is little competition between them.

Our kind of free market economy does not provide for competition. It has created a kind of cartel system while the rates are fixed by common consent of the banking community.

For maintaining such a system, senior bankers are paid very high salaries and perquisites as well as large bonuses. So, the banks are able to make a 100 per cent profit and their shares are the stars in the stock exchanges.

National Bank leads the way, despite being a state-run bank. For all that it is not easy to get long-term loans for industrial investment after the National Development Finance Corporation (NDFC) went down and the Industrial Development Bank has been facing a battle of survival.

The SBP is now exploring the means to induce the banks to come up with enough investment loans on a long-term basis. The task is proving to be tough in view of the long history of large loan default.

As the profits of the banks are too large, foreign banks are seeking mergers with domestic banks. The Standard Chartered Bank has taken over the Union Bank; the Barclays Bank of London is looking to buy for another bank. ABN Amro is reported to be interested in the Prime Bank. We may see more mergers of banks as Basel II is enforced by the SBP to safeguard the interests of banks and its depositors.

Banks now find short-term well secured consumer loans far more profitable and easy to provide, whether that be for cars or other imported luxury items or for building or buying houses.

In the existing context, the competition for banks has come from a government organisation- the Central Directorate of National Savings (CDNS)- which has reversed its policy of not letting institutions deposit their money with it and prefers individuals including widows, pensioners and senior citizens.

Banks and insurance companies will not be able to put their money in the CDNS, but most other institutions can invest in it and then get higher profit than what the bank offers.

The CDNS has a deposit of over Rs1 trillion. Investment with the CNDS is safe as these deposits are guaranteed by the government and used by it.

Unlike the security assured by the CDNS, we have seen several private banks collapse. Among them were the Mehran Bank, the Indus bank and Bankers Equity and now the Crescent Standard Investment Bank with its large deposits, is bursting with scandals.

Earlier when the largest development finance institution , the NDFC was going down the tube, the government stepped in promptly and merged it with the far larger and more resourceful National Bank of Pakistan.

The depositor’s interest was saved. The depositors in the private sector banks have no such protection. Some of their loans are said to be insured, but now the banks are being allowed to set up their own insurance companies and insure their own loans. That is risking too much in the case of weak and badly managed banks which may not be able to protect their imperilled deposits as the insurance companies too fail. The banks and insurance companies should be separate entities instead of the insurance companies becoming a tool in the hands of banks.

Now comes the Islamic banking with full vigour and too many banks are opting for it. How well they will reward the depositors remains to be seen. Islamic banking is based on trust and will be judged by its performance and not by its label alone.

The CDNS has a large variety of products. It has prize bonds up to a denomination of Rs40,000 and a prize of Rs50 million. The CDNS is moving towards automation beginning with the use of ATMS for depositors to draw their income. It has improved its return on the deposits and relocated over 200 offices in more accessible locations.

The new profit rates including six per cent on simple savings are attractive. It will become a computerised outfit and later the depositors can draw their money from any of the CDNS units.

A higher rate of domestic savings rate, now at of 10.3 per cent, is needed for a variety of reasons. We needed to reduce or delay consumption and bring down the demand pressure on the market and lower the inflation which has been plaguing us.

A larger trade surplus is needed to achieve higher exports. We need to reduce the imports that is now causing $12 billion dollar a year deficit. That would also mean we would need less of industrial raw materials and oils for consumption at home.

We need larger savings to have enough funds for development, particularly for the infrastructure and meet the annual development outlay of Rs415 billion.

Larger domestic savings could also be used for higher education of children in high income families. It would also mean less dependence on foreign aid with its stiff conditionalites. The CDNS reforms are indeed very timely but how well they succeed remains to be seen.