KARACHI, March 4: Banks paid a paltry average return of 1.34 per cent to their depositors in January this year whereas they charged an average interest of 5.04 per cent from the borrowers. Thus the difference between average lending and deposit rates stood at 370 basis points.

The economic managers of the country may take a pride in the fact that this low banking spread does indicate that banks have become healthier. But for the majority of those who keep money with banks 1.34 per cent average return on deposits is a cause of concern.

The business community does appreciate the decline in average lending rate even at the cost of falling rates of return on bank deposits. But businessmen say the benefit of low interest rate is not widely shared.

"Effective lending rate for a vast majority of businessmen is still around nine per cent," says senior vice chairman of FPCCI standing committee on sick units Sardar Muhammad Ashraf. "A very small number of top businessmen are getting loans at around five per cent or so."

The latest data on lending and deposit rates released by the State Bank shows that weighted average lending rate of all banks combined fell to 5.04 per cent at end-January 2004 from 9.95 per cent a year earlier.

Their weighted average rate of return on deposit declined to 1.34 per cent from 3.21 per cent during this period. Thus the banking spread or the gap between the lending and deposit shrank to 370bps from 674bps. Heads of banks as well as economic managers say this shows that the banking system has become a lot more efficient.

"But the problem is the low interest rate is neither helping in creation of fresh entrepreneurship nor in revival of sick units," laments Mr Ashraf who is also a member of the National Credit Consultative Council.

At 1.34 per cent the average rate of return on bank deposit at end-January 2004 was far below year-on-year increase in consumer inflation in the same month i.e. 5.15 per cent. It was also lower than an annualized 3.38 per cent increase in consumer inflation in seven months to January 2004.

Bankers and central bankers say the average rate of return on bank deposits appears lower than what banks are actually handing out to their customers. They say this because banks zero-rated current accounts are also included in the total deposit base of the banking system while calculating the weighted average rate of return on deposits.

But central bankers say current deposits do not make up more than one fourth of the total deposit base of the banking system. Saving and fixed deposits make up the remaining three fourths.

This means that the weighted average deposit rate of the banks represents up to 75 per cent of what they pay on saving and fixed deposits. "Keeping this in mind one can work out the so-called real rate of return the banks are paying to the depositors (after offsetting the impact of zero-rated current deposits)," said a former central banker who refused to go on record.

His working showed that 1.34 per cent weighted average rate of return on bank deposit would rise to 1.79 per cent if the impact of zero-rated current deposits were to be offset. Even at this level the return on deposits is below inflation.

But bankers say one should not compare weighted average rate of return on deposits with inflation because inflation does not serve as a benchmark for banks in determining returns on deposits.

They say that the returns on bank deposits are market- driven meaning that if banks can raise deposits at low rates why on earth they should bother about whether the rates are below inflation.

What has helped banks raise deposits below inflation rate is the overall decline in the interest rates structure at a time when there is huge liquidity available in the economy - thanks to increased workers' remittances or the money sent back home by overseas Pakistanis.

"A better though not perfect clue could be had from treasury bills rates (at least for comparing short term deposit rates," said a big local bank's treasurer.

In July-December 2003 majority of banks did offer a rate of return on short-term deposits only a few basis points above the T-bills rate of similar tenure. In some cases the rates of return on deposits was even lower.

Keep in mind that weighted average return on treasury bills of three month; six month and one year was around 1.45 per cent; 1.65 per cent and 1.98 per cent at end-December 2004. Now see the rates of return offered by some leading banks on these tenures for six months ending in December 2003.

National Bank of Pakistan: 1.20pc on three months; 1.70pc on six months and 2pc on one year.