Bank depositors have never received a fair treatment from banks. In the past, it was not even considered worth a serious discussion.
There is a welcome change following the introduction of tight monetary policy. Banks have been quick to hike interest rates on advances but very reluctant to properly share it with depositors. The resultant sharp increase in bank spread and phenomenal rise in profits have pushed the question of meagre return to depositors into lime light. The last governor of the State Bank lamented it at the fag end of his tenure.
The present governor has also taken notice and has been urging banks to do something about it but they do not pay due heed . In the last public comment, she has been compelled to advise depositors not getting fair return to change their bank. The advice is feasible if one or two banks were low rate givers but not when the entire banking system is exploitative
The weighted average of banks’ advance rates have gone up from 3.92 in June 04 to 11.29 per cent in March 07 but the deposit rate has moved up from 1.21 to 3.29 per cent.. Banking spread has widened from 5.28 to 7.37 per cent. The overall deposit rate is obviously very low and, in fact, negative in real terms by a big margin but it gives no idea of the plight of small depositors. Banks have developed slabs with graduated rates favouring large depositors.
For instance, for saving deposits, NBP has two slabs; one up to Rs20,000 with the return of 0.2 per cent and the other above that level with 1.2 per cent as of end-December 06. MCB has the same slabs but with returns of 0.1 and one per cent respectively. ABL slabs are up to Rs100,000 and Rs100,000 and above with returns of 0.1 and one per cent respectively. The returns are subject to withholding tax of 10 per cent. The rate of progression of 1:6 in case of NBP and 1:10 for the other banks for just one rupee to change the slab is noteworthy. It is also worth mentioning that Rs20,000 and Rs100,000 are equivalent to 4.7 months’ and 23.7 months’, almost equal to two years’ average per capita income, as per FY 06. Within the same type of deposit, the return is graduated according to the size of the deposit. For instance, ABL has as many as 8 slabs of PPA Operational Accounts starting from a return of 0.10 per cent for less than Rs100,000 and going up to 8.5 per cent for Rs500 million and above.
Banks have also prescribed minimum balance to be maintained below which a monthly service is imposed. Mostly this is fixed at Rs5,000, which is equivalent of 1.2 months’ per capita income. Foreign banks have prescribed much higher minimum balance. This is a practical demonstration how rich are made richer and poor poorer by banks.
There is no organised lobby to look after the interest of depositors. This does not mean that they can be taken for a ride for ever. Their reaction to the maltreatment may be very slow but they are not such fools as not to feel the pinch. Some indications of their reaction are there as they are walking away from banks. The number of personal deposits is currently only16.4 million which is only 1.06 per cent of the population. The overall number of deposits of all kinds has declined. After reaching the peak of 33.2 million accounts in June 1997, they were down to 28.8 million in 2000 and 26.3 million in 06. This means a drop of 20.8 per cent.
The SBP would be well advised if it, instead of bemoaning the situation, were to spare a moment for introspection to see whether its own monetary management creates the enabling conditions for banks to exploit depositors. It is significant that in terms of BCD Circular No 34 of 26 November 1984, banks declare their return on deposits after approval by the SBP. This makes the bank a party to the shabby treatment meted out to depositors in general and small depositors in particular
Banks do not care for depositors, particularly the small ones even though their over all contribution is quite significant, because they are flushed with liquidity without much effort. In the present analytical framework for change in monetary assets, the role of the SBP in creation of money is lost sight of. Normally central banks serve as the lender of sort to ease the temporary liquidity problem of financial institutions who can borrow from them. This shifts financing from the institutions to the central bank and does not create additional money.
For historical reasons, the SBP goes much beyond that for the developmental role it has assumed for which it creates a lot of fresh money. This is in addition to its financing of fiscal deficit. In the early 50’s, when private capital was practically non-existent, the SBP took upon itself to create, finance and even manage new financial institutions. Even though more than half a century has passed and the economy and private capital fairly developed, the umbilical chord of these institutions is yet to be severed, hence they do not make any effort to be self-sufficient by raising funds thorough deposits.
Injection of additional money when the economy has excess liquidity only adds fuel to the fire and this is ultimately detrimental to depositors and savers in general. The fact that the SBP accounts for 23 per cent of outstanding money supply as of end–March, 07 underlines its quantitative significance. In terms of various elements, their share was Claim on Government (mostly government securities), Rs555.2 billion, or 64.8 per cent; Claim on Depository Corporations (scheduled banks), Rs276.6 billion, or 32.2 per cent; and Claim on Other Sectors (NBFIs), Rs16.1 billion, or 1.9 per cent, all adding up to Rs857.4 billion This accounted for 22.6 per cent of money supply, 74.4 per cent of reserve money, 25.4 per cent of domestic credit, and 66 per cent of personal deposits (December 06).
The fact that the SBP accounted for 74.4 per cent of reserve money is noteworthy. During the period of so-called tight monetary policy, that is after June 04, the SBP creation of money at Rs483.3 billion accounted for 31.8 percent of the increase in monetary expansion, 78.4 of reserve money and 35.3 per cent of the increase in domestic credit.
Equally important, if not more, is the formula prescribed by the SBP for distribution of income between banks and their depositors way back in 1984. In terms of BCD Circular No. 34 of 1984, banks have been allowed to charge 10 per cent management fee on income minus proportionate administration cost and provision for bad\doubtful debt. The balance is to be distributed. In that case, a weightage of up to five has been given to banks’ equity. This is perhaps a unique arrangement, which is blatantly unfair, to say the least. One is at a loss to imagine what on earth can be the economic justification to favour the bank so liberally and that too at the expense of millions of helpless depositors most of whom are small depositors, while the country has one of the lowest rates of domestic saving in the world.
The SBP should not be hide-bound. It must recognise development of the economy since the early 50’s and a massive inflow of external resources after 9\11. This has enhanced the capacity of the privet sector to save as well as invest. The SBP should frame its policies in an even-handed manner and according to the ground reality. There is no more justification of its development role by way of financing and it must restrict itself to its traditional function of the lender of last resort.
Where subsidised credit is justified, it should not be extended in the form of refinance, which means creation of money and distortion in the monetary situation, but by cash subsidy to banks. This would be more transparent and straight-forward without complications for monetary management. The SBP should reconsider its policy of subordinating monetary policy to fiscal policy so as to reduce the cost of debt to government.
The SBP publications have repeatedly stressed that central banking financing of government deficits is most inflationary. What the government saves in cost of servicing debt it pays more than that in higher expenses due to inflation and this affects the whole range of domestic public expenditure except salaries and pension which are controlled. Government can increase non-bank borrowing through small saving schemes (SSS), even at the existing rates of return by expanding the network of saving centres at present about 700 only and by activating post offices by giving them suitable monetary incentive. There is a strong case for increase in return on SSS to ensure a reasonable real return reflecting the scarcity of capital in a very low saving rate.
Finally, it is to be remembered that large profits by foreign banks, which can be repatriated freely, entail a drain on the country’s foreign exchange. The figure of what they have been remitting is not published by the SBP but this has to be substantial.
Bank depositors have never received a fair treatment from banks. In the past, it was not even considered worth a serious discussion.
