Banks in Pakistan have the best of times for sometime now. They never had it so good in terms of profit, and they include many of the new banks as well. And the helpless depositors in these banks have the worst of times as the return on their deposits have never been so low far so long.

The gap between the average lending rate of banks and the average return on deposits is widening steadily. And the government has been forced to introduce a special savings scheme with higher interest rate to help the windows, pensioners and senior citizens with modest deposits.

Bankers had always had it good in Pakistan as they could lend large sums to their relatives, friends and political patrons by twisting the rules; but now, thanks to the intervention of the State Bank of Pakistan (SBP) and the Securities and Exchange Commission of Pakistan (SECP), to protect the interest of the banks, they are doing much better as their annual, six-monthly and quarterly reports show.

The banks, particularly the large public sector banks, have dumped their large bad loans into the arms of the CIRC to recover whatever amount possible. And they usually avoid large long-term investments and prefer commercial loans which mean short term lending. Even better they prefer consumer banking with a higher interest and reasonable security.

Some of the banks have made good money by speculating in the stock market or by making short term investments. The State Bank has now restricted such investments to 20 per of their assets, which many have exceeded.

The SBP's monthly bulletin for March, 2004, says that in January, 2002, the average lending rate of banks was 13.19 per cent and the average deposit rate 4.6 per cent. And in June, 2003, the average lending rate was 9.40 per cent and average return on deposits 2.08 per cent - a difference of almost five times the deposit rate. The banking pattern is too heavily weighted in favour of the banks, and too heavily against the depositors.

In July, 2003, the average lending rate was 5.12 per cent and the average deposit rate 1.70 per cent - the difference was 340 per cent or 340 basis points. In May, 2004, the average lending rate was 5.42 per cent and the average deposit rate 1.21 per cent, and the difference was 4.21 per cent or about 3.5 times the deposit rate.

The banks justify the low interest on the basis of the low inflation in the country which the government claims is under five per cent, which is not a market reality.

The banks have not only got rid of their large bad loans to the CIRC but also retrenched many thousands of staff, including middle level officers. But the bank chiefs have employed scores of senior officers from foreign banks who were their former colleagues at very high salaries and with generous perquisites.

They have also embarked on a major publicity and advertising campaign to popularise their image. The banks are not afraid of shrinking deposits because of poor returns on deposits.

There is plenty of money afloat in the market and more is coming. The National Credit Consultative Council envisages an 11.4 per cent increase in money supply in the current year which means Rs 280 billion.

The private sector is to be provided Rs200 billion in the current year. The money supply for the private sector approved last year was Rs 85 billion, but actually the private sector borrowing was Rs300 billion.

When interest rates around the world crashed led by the US, which touched its record low interest level for several years, the interest rates in Pakistan remained stayed put at a high level.

It is now that the Zarai Taraqqiati Bank had reduced its interest rate for farmers from a high 14 per cent to 9 per cent, along with one per cent reduction more for prompt repayment. It waited for too long to act. And the farmers are to be given loans of Rs. 85 billion this year.

The fear is the big fish may get most of the loans, and not the small farmers but the government is assuring the small farmers that justice would be done to them.

That has been the unfortunate tendency of our officialdom: when anything good for the people or beneficial to them is promised that is done too late, but when it comes to burdening the people and the government benefiting by that, it acts quick.

A foretaste of what was to come as enhanced interest rates was given in June when the interest rate on export credit was enhanced from the bottom 3 per cent to 3.5 per cent.

Now the SBP's monetary policy released on Wednesday says interest rates would rise in the first six months of the current year gradually in response to liquidity constraints. And it attributed the rising interest rates to rising interest rates in the financial market.

And the SBP which is indulging in large borrowing is itself raising the yield on treasury bills and the Pakistan Investment Board. On Wednesday last it sold Rs66.907 billion worth of six monthly treasury bills after receiving bids worth Rs97.8 billion at a yield of 2.58 per cent.

As long as the SBP sucks off such large amounts from the open market it has to raise its yield to attract enough offerings. In the West, too, the interest rates are rising slowly, particularly in the US to prevent over-heating of the economy.

The governor of the SBP, Dr. Ishrat Husain, says low interest rates helped the growth of the economy by 6.4 per cent last year, reinvigorated the private sector and created employment. Interest rates are the only tool the SBP has to accelerate the economy and hold the inflation down, he says.

Interest rates would increase gradually now so as not to aggravate the inflation. Wheat prices are already up by Rs100 to Rs120 for a bag of 100 kg and that has angered the wheat market which has been in turmoil for long.

With so much money afloat in the private sector the prospects of even higher wheat prices are real as manipulators continue to be at work all the time. And when wheat prices rise all other prices rise, and lastly now vegetable prices as well.

But the bankers are able to make money through their vigorous consumer banking. Helping them in a big way is car lease and other consumer products sales are the leasing companies who find consumer leasing less risky and more profitable than funding at long term industrial investment.

And some of the credit card companies are still charging an average of 3 per cent per month, unaffected by the increasing new competition. The SBP does not want to interfere in their business and ask them to reduce their rates and instead lets the competition bring down the rate. But there appears to be some kind of cartel system among the bankers in consumer banking.

The banks are also able to benefit by hiring the surplus staff of the old banks who had been retrenched on low salaries, while the top dogs get the best salaries, particularly if they come to local banks from foreign banks and is a part of the old boy network.

Now some of the retired overseas Pakistanis who have come home want to be enabled to open the National Savings Behbood Savings Account with its two per cent higher returns than the normal.

A group of Pakistanis from Bahrain has been urging President Musharraf to let them subscribe to this fund for widows, pensioners and senior citizens even if they retired at the age of 50 to 55 abroad.

They want a better deal for the retiring overseas Pakistanis who were in service in the Gulf and made their regular remittances to Pakistan. But the catch is that some of them did not send their remittances through the banks and hence there is no clear proof of regular payment.

Overall, I am receiving several enquiries from concerned or baffled citizens asking how real is this banking bonanza and how lasting it will be and if there is too much window dressing. Only Dr. Ishrat Husain can reply to such queries on an authoritative basis or convincingly.