HAD it not been penny-pinching attitude of family budget maker, the housewives who battle each day against inflation, the domestic savings rate would have been more dismal. It is a pity that instead of getting appreciation they are being penalised in Pakistan.
The money set aside by them in banks lose value at a rate higher than the rate of interest they are being offered. The real rate of return on deposits in Pakistan is thus negative.
The broad day robbery being committed by the rich banks by offering negative rate of return on deposits finally attracted the attention of the lady Governor of the State Bank of Pakistan. Last week, she warned the commercial banks of the central bank's direct intervention if they fail to review their rate of returns on deposits to make it more saver-friendly.
Big banks in Pakistan under a banker Prime Minister, with record 7.5 per cent banking spread, are making a killing. The average nominal lending rate is 12 per cent and average rate of return on deposits is 3.5 per cent with their spread stretched to high 7.5 per cent. With internal mechanisms transformed, banks opted for exposure up to 80 per cent in some cases and achieved profitability as high as around 80 per cent last year.
Dr. Shamshad Akhtar, SBP governor in a press conference at the launching of SBP annual report categorically said that the central bank would wait till January 2007 for the banks to voluntarily make a correction in their interest rates on deposits policy. If banks fail to respond to the call, the central bank would move its regulatory arm to remove the anomaly that discourages savings in the country.
It is pertinent to note that it took SBP three years to issue a warning to banks in favour of depositors. Regulators are supposed to be ensuring that players observe rules of the game. Why it took so long to issue a warning and how much more savers will lose before some action is initiated against banks hurting key stake-holders , is anybody’s guess. The lady governor did not feel any need for an explanation.
Pakistan needs better domestic savings to base its economic expansion on dependable internal resources. Currently domestic saving to GDP ratio, according to the World Bank data is among lowest in the region at 12.2 per cent. According to the current SBP report, the national savings to GDP ratio touched 16.4 per cent, the lowest level since FY2001. Savings to GDP ratio in India is about 30 per cent and in China at amazingly high at 50 per cent. In a recent report on savings in Pakistan the World Bank highlighted the issue. It has reportedly asked the government to take measures to improve the country's abysmally low savings to GDP ratio.
Saving is said to be a hard task to master. It, however, is absolutely essential for successful domestic money management. Especially in an environment like that of Pakistan, where there is no social security net or well designed pension programmes, salaried class saves for contingencies and old age.
From national perspective, savings fuel capital formation in an economy. Saving channelled through banking system is directed towards socially most desirable investment avenues.
It is an undisputed fact that growth propelled on internal resources is predictable and therefore more sustainable. Both for investment and capital formation savings are crucial. Do we have right policies in place to encourage people to save?
On the contrary, in Pakistan the banking sector with captive savers base of middle classes is rather instrumental in discouraging saving habits amongst people. The base is captive because the middle class, dodged by Dadabhoys, cooperatives and likes, are too risk avert to experiment in hope of better gains. For the last four years, for all practical purposes,the banks have been eating up depositors' savings. The money parked in deposits is getting eroded by substantial margin as the rate of return does not compensate for the rate of inflation.
According to our sources in the financial sector, the weighted average return on deposits came down from 5.98 per cent in 2000 to 2.5 per cent in 2003, to 1.15 per cent in 2004, to 1.09 per cent in 2005, to 1.67 per cent in 2006.
During these years the inflation rate has been 3.58 in 2000, 3.10 in 03, 4.57 in 04, 9.28 in 05, 7.92 per cent in 2006.
The real rate of return was, therefore, 3.58 per cent in 2000. It turned negative in 2003 at -.40 per cent. In 2004 it was minus -3.42 per cent, in 2005 it reached minus -8.19 and in 2006 it is -7.92 per cent. What does this mean? Why should negative return be worrisome?
This means that instead of getting return on savings in form of interest, depositors are losing value for every rupee they save with bank since 2003. In 2003 depositors lost 40 paisa worth of value on every hundred rupee with a bank on an average, in 2004 the loss increased to Rs3.42 on every hundred. In 2005 depositors lost Rs8.19 worth of value on every hundred with a bank. In 2006 unsuspecting depositors are losing value worth of Rs6.25 on every hundred rupee that they have deposited with a bank.
Is this not an irony that while rich real estate investors, stock brokers and players in country's commodity market made billions on cheap borrowed money, the depositors whose money banks lend were deprived of the value of their savings?
What has actually happened in the name of free market in the financial sector in Pakistan over the last few years, according to an economist who wished not to be named, is that the resources are actually diverted from the middle classes to the rich. Banks have mediated at a high fee to transfer savings of resource-starved middle class to resource abundant unscrupulous richly rich. How cheap credit was used to create distortions in the rest of the economy is another story.
The enviable balance sheets of banks were so glaringly attractive that they caught attention of international banking institutions. These green accounts, however, fail to mirror the ugly face of banking sector and depict their socially irresponsible behaviour. Depositors are stake holders in banking sector. Banks must not be allowed to play on their vulnerability. It is not justified to exclude them from gains in a fair season or take advantage of their ignorance when banks are making unprecedented profits.
What banks have to say in their defence? Dawn tried to contact presidents of five big banks to solicit their view on the SBP call regarding deposit rates. Except for president of Habib Bank none deemed obligated to share with people their views on the issue. Our sources in the financial sector confirmed that an exercise to review and evaluate options has started in all banks to avoid any punitive action by the regulators.
Zakir Mehmood in a detailed reply mailed to Dawn defended banks. He gave details of medium and long-term products being offered by banks. He said, “banking sector customers now have a wide choice of products and services…..This has been possible because of the financial restructuring reform programme that the SBP and the commercial banks have implemented which has created a highly competitive banking environment where banks pursue customers actively for their business”.
On the criticism by the SBP governor he wrote, “At HBL, we have already taken action on governor's concern. Cognizant of the needs of small savers, in August 2006, HBL introduced the 'HBL Value Account' a special deposit scheme for small savers where we pay a very attractive return of seven per cent per annum”.
Indirectly defending the low interest rate on PLS accounts Zakir took a position: “Saving deposit schemes are structured to mirror the actual savings of customers and are designed to encourage regular deposits with pre-defined number of withdrawals, transactions per month etc. A key feature to understand is that what has been termed traditionally as saving deposit accounts are in fact normal operating accounts with no saving features in their operation. As such, these are operational current accounts on which mark-up is being paid”.
“Why blame banks alone what about the return on saving schemes of the government. Except for return on Behbud a scheme for senior citizens, real rate of return on special saving certificates is also negative?”, said Abid, a frustrated school teacher.
