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Shrinking numbers of small bank depositors

August 12, 2012

THE State Bank of Pakistan has issued a series of instructions to banks over time to facilitate small depositors but their number is declining despite increase in bank branches.

The steps taken by the regulator to encourage depositors include:

*    Banks shall not refuse opening of accounts for prospective clients who meet requirements laid down in Prudential Regulations, other instructions issued by the SBP from time to time and bank’s own policies.

*    Services rendered by banks for the opening and maintenance of regular savings accounts shall be free of charge.

*    There shall be no condition of maintaining a minimum balance for these accounts.

*    No charges would be recovered by banks at the time of closing an account.

*    Banks shall not demand more than Rs100 as an initial amount for opening of regular savings account.

*    Banks shall pay profit invariably on Profit and Loss Sharing Accounts without any condition of minimum balance.

However, it has been observed that in recent years the number of account holders, in particular the number of small depositors, has declined.

Among other factors for this trend, the levy of service charges on deposit accounts is considered to be one of the main reasons.

The banks have been paying higher rate of returns on deposits of larger amounts.

This has, to some extent, increased the average rate of return on deposits but the real beneficiaries have been big depositors.

With a lower rate of return, small depositors are being discouraged. The total number of accounts of Rs10,000 or less which were 14.4 million on June 1999 reduced to only 9.3 million on June 30 2004, showing a fall of 5.1 million accounts. This further reduced to 7.8 million on June 30, 2007 and 4.1 million in December 2011.

A ‘mystery shopping expedition’ conducted recently revealed that the minimum balances required to avoid penalty fees tend to be high. Moreover, although the initial deposit to open an account is substantially lower, banks usually demand Rs5000 (except for National Bank of Pakistan which demanded Rs1000).

An exception was the Basic Banking Account(BBA)offered by the largest banks surveyed, but these accounts only allowed twice monthly withdrawals without penalties, while low-income group prefers to access its funds at any time.

The large banks offering such accounts received the worst marks for information and service from ‘mystery’ shopper. Although the private and foreign banks ranked better in terms of service, they failed to inform the ‘mystery’ shopper about BBA which all commercial banks are required to introduce under the SBP directive.

Currently, the commercial banks do not seem to be geared or inclined to serve the low income groups. A look at geographical footprint and products confirms this. The banks’ branch network is not well distributed in the country from the point of view of providing services to the low income population. About 75 per cent of the urban adult population has a bank account as against only 14 per cent of the rural adults.

The large footprints of big banks makes them prime candidates for mobilising savings from low income population. These institutions hold more small deposits compared to other types of banks but need to do more. The relative ease with which these banks can mobilise large volume of funds means they are flush with liquidity and have little incentive to pursue the small depositors.

Breakdown of branch and deposit data shows that the five large banks account for 69 per cent of the bank branches and 40 per cent of these are located in rural areas. The presence of these banks in rural areas is a legacy of bank nationalisation era when it was mandatory to open two branches in ‘un-banked’ areas for every branch established in a banked area.

As four of the five largest banks have been privatised, they have rationalised their size, reduced staff and closed down branches.

Over 700 branches were closed between 1997 and 2000, of which over 330 were located in un-banked areas. This follows an all too common pattern in the post-privatisation of financial institutions.

Rather than looking at improving the bottom line by increasing revenues, the focus is on reducing costs and hence branches in unbanked areas are closed and staff retrenched. The consequence of such restructuring is that people in the un-banked areas lose access to banking service and are forced to more costly informal sources.

A better strategy to prevent shrinking access would be to increase the revenues of these apparently unprofitable branches through pricing for the so-called un-banked areas. Access to credit is a much bigger issue than pricing for those excluded from the net of formal financial services. They bear high costs in the informal sector.

In the World Bank’s report ‘Finance for All’? (2007), Pakistan does not fare badly in comparison to other countries in the region when it comes to saving services. The minimum amounts required to open and maintain savings and checking accounts are not higher than in other countries of the region having higher savings rates than Pakistan. Nor does the documentation necessary to open an account appear to be excessive against a regional perspective. This may indicate that there are other factors discouraging savings, such as informal savings culture, banks’ customer services and urban focus of banks.