SBP policy rate

13 Jul 2020

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APROPOS the report ‘Interest rate cut by 100 basis points to 7pc’ (June 26).

The SBP policy rate has come down to seven per cent from its peak at 13.25 in January 2020. The rate has been revised five times during the last four months on the grounds that inflation has come down and that the government wants the banks to provide cheaper credit to the private sector in order to boost business activity.

A question: while the National Savings Centre and the banks have reduced interest/ profit on different deposits schemes, the banks have, however, not reduced the interest/markup on personal loans extended to the salaried class, on existing loans as well as fresh ones approved.

The personal loans, mostly taken by the salaried class, are consumptive in nature, where no value is added to the principal amount by the borrower. Thus it does not justify the exorbitant fixed interest/markup that is charged.

As a layman, I did a case study to better understand the intricacies of banking. The banks offer their products under different nomenclature, as a marketing gimmick. The data I have collected pertains to one segment and that is, interest/profit on saving chequing accounts vis-a-vis interest/markup on personal loans.

The information extracted from the different public documents available on the official website of different banks with little variation is as follows:

The interest/markup on loans continues to be in the high bracket range of 32.99pc to 35.99pc per annum, depending on the tenure, while the indicative interest/profit of 11.25pc on saving chequing accounts for the period 01.01.2020 to 30.06.2020 has been reduced to just 6.5pc. (further reduced to 5.50pc wef July).

This reflects a steep drop in the rate of interest/profit on deposits.

The spread /margin has widened from 24.74pc to 29.49pc between what the banks earn and what they give to their customers as return on deposits, the bank being the gainer.

Logically speaking, if the cost of deposits goes down, as a matter of principle the interest/markup on consumer loans should also automatically be adjusted. So instead of getting this benefit, the customer is being skimmed at both ends. The depositor is getting a lesser return on his funds while continuing to pay a high interest/markup on debts. Why? Is there no one to check such irrationality in the banking sector?

Muhammad K Sufi

Islamabad

Published in Dawn, July 13th, 2020