KARACHI, March 28: The banking spread, the gap between lending and deposit rates, has been increased by the private banks which rose by 167 basis points in just one month. While the depositors are taking the full brunt of 8.5 per cent inflation, the private banks are on a free ride to pocket as much as possible from the depositors’ genuine share in the banks’ profits.
The latest banking data posted by the State Bank on Tuesday revealed that the weighted average lending rate of private banks reached 10.18 per cent in January, while the weighted average return on fresh deposits was 3.06 per cent.
This shows that the gap between the lending and deposit rates (banking spread) was at 7.12 per cent in January 2006, while it was 5.45 per cent in December 2005.
Banks’ depositors could not see any positive improvement in their returns in the first six months of the current fiscal as the banking spread of private banks further increased.
The listed banks’ results showed that the banks earned average 99 per cent growth in their profits during the calendar year 2005. Banks had been making record profits for the last couple of years.
The banks’ results also showed that the most of the income was coming from the interest rates and the current data showed that the profits were not being shared with the depositors.
Banks’ argued that the higher profits were earned through better performance and cost cutting measures. Analysts believe that it was only half truth. If the depositors were to get good profits, the banks’ profits would definitely go down.
Private Banks are the main source of credit for the market and they have a key role in mounting credit to the private sector. The credit to the private sector has reached close to Rs325.6bn in eight and a half months of the current fiscal which is just few yards away from the last year’s record credit lending.
The weighted average return on deposits in January 2006, was 3.62 per cent for public banks, 3.06 per cent for private banks, 3.90 per cent for foreign banks, 7.58pc for specialized banks and 3.26 per cent for all banks.
The banking spread of all banks has also gone up by 120 basis points in one month. The spread rose to 6.50 per cent in January 2006, from 5.30 per cent in December 2005.
The poor return on deposits failed to attract the attention of the SBP, which is the regulating authority and protector of the depositors’ money. Analysts said that the SBP would not intervene for another year as the banks have proved to be the real engine behind the economic growth of 8.4 per cent in 2004-05.
To make record profits, banks also took a big jump in offering advances. The advance-to-deposit ratio has gone up to 77 per cent. This huge increase of advances has also increased the risk of default.
