KARACHI, June 7: The five per cent excise duty on fee and commission of banks would not affect banks’ profitability, as the load would be passed on to the customers, said bankers and analysts.

The government in the budget for 2006-07 announced to impose a five per cent excise duty on fee income of banks. The bankers said the duty would not affect the banks’ profitability as it would be passed on to the customers. However, the banking analysts said the impact of five per cent duty on banks was ignorable.

“I don’t think that banks would take the load. It will be simply passed on to the customers,” said Arshad Arif, director at KASB Bank.

The government has also increased the tax on withdrawal of money from banks and made it double as compared to the previous year. The withdrawal of Rs25,000 or more from banks were subject to 0.1 per cent tax. It has now been increased to 0.2 per cent.

“In the worst case if the banks take the hit on their books then on an average, banks’ profits will be affected by two per cent,” said Mohammad Imran, analyst at JS brokerage house.

He was of the view that the tax on cash withdrawal was to document the economy. “I don’t see any major impact of cash withdrawal on banking deposits.”

However, depositors, including the business community, voiced their concern over the increased tax on cash withdrawal. “Both the banks and government will earn from the depositors’ money.”

Banks have been keeping most of the profits which result in the high banking spread, showing that the depositors are getting much less than what they deserve. The banks booked 99 per cent profits last year. The banking spread was over seven per cent and they passed on just four per cent return to the depositors, despite the fact that banks’ cost of mediation has dropped significantly during the last five years.

The government has further reduced the tax on banking industry this year. Now the tax on the banking industry has come down to 35 per cent, which is equal to the corporate sector.

“The situation is difficult to digest. While banks are making record profits and tax on banks has been reduced for five years, the depositors were further loaded with the tax,” said Saleem Abbas, a bank depositor.

He said practically the government had deprived the depositors of their profits already negative in the wake of high inflation which was double than returns on deposits.

The analysts said banks would continue to do good business this year, as the economic growth would be at the higher side. The government has set a target of seven per cent GDP growth for 2006-07. It will alone borrow Rs140 billion for the budgetary support from banks. The figure was Rs120 billion last year.

“If the economic growth, which is 6.6 per cent this year, remains in the same range, the banking sector will increase its lendingfurther,” said a banker. This year commercial banks credit to the private sector crossed the previous year credit volume in just ten months of the fiscal year 2005-06.

Most of the income is interest-based and bankers believe that the base will be further widened. They said the lending rate would increase while the return on deposits would rise at a much slower pace.

However, banks claimed that they were offering products of higher returns, but the depositors were not ready to keep their money in time deposits. Keeping money for longer period could yield more money for the depositors, said a banker.