KARACHI, Sept 17: The State Bank Governor Dr Ishrat Husain said here on Saturday he was unhappy that the banks have not been giving a fair return to depositors for some years.

“I am…unhappy that the depositors haven’t received a better deal in the last few years,” he said while speaking as the chief guest at the 55th annual general meeting of the Institute of Bankers Pakistan.

But he said he hoped that “this situation is undergoing a reversal,” implying that banks have realized this and are trying to give their depositors a better return than before.

“Banking, unlike other businesses, is based upon trust. Millions of small depositors have entrusted all their savings in the hands of the bankers,” he said.

The SBP chief pointed out that the owners of the banks or major shareholders have limited stakes. He said the equity capital of the banking system is about seven per cent of the balance sheet while 93 per cent is derived from the depositors’ money. So, for each one rupee lost by the shareholder in case of the systemic crisis, the depositors will lose thirteen rupees.”

These words of the SBP chief are no compensation for the rough deal the depositors have received from the banks. But they show that the central bank at least shares their grief, if it cannot reduce it, as the flip side of the banking sector reforms is that they have made it difficult for the regulators to intervene — when where the intervention is genuinely required.

According to the State Bank data, the gap between the average lending and deposit rates widened to 6.56 percentage points in June 2005 from 5.28 percentage points in June 2004. This happened as the average lending rate of all banks combined rose from 6.49 per cent in June 2004 to 8.41 per cent in June 2005 but the average deposit rate only inched up from 1.21 per cent to 1.85 per cent during this period.

This widening of the spread between average lending and deposit rates shows how much the banks care for the depositors and how much relief the banking sector reforms has brought for the savers.

By charging more from the borrowers and giving less to the savers the banks have increased their profitability, part of which is admittedly goes again to the savers who are also small shareholders. But a broad question is how long banks will be able to generate deposits by offering such a humiliatingly low return to the savers?

And even if they continue to raise deposits despite offering low rates of return, is it fair on their part to keep doing so, and what role the central bank should play to provide relief to the savers?

The Federation of the Pakistan Chambers of Commerce and Industry lately suggested setting up of an expert committee to help the SBP formulate its monetary policy with particular focus on safeguarding the interest of the small savers. But the government has so far ignored this suggestion.