KARACHI, Aug 9: People continue to get negative real rate of return on bank deposits. But banks have lately started paying higher rates of return on fresh deposits.

The Weighted average return on fresh deposits (excluding those carrying zero return) has risen by 59 basis points-from 1.40 per cent at end-January to 1.99 per cent at end-June 2004.

But the weighted average return on all fresh deposits including those carrying zero return has inched up by only 7bps-from 1.12 per cent to 1.19 per cent. The increase in the deposit rate is a healthy development.

But one should keep in mind that 1.40 per cent return on fresh bank deposits indicates the average return on fresh deposits mobilized or the deposits repriced or rolled over during January this year.

Similarly 1.99 per cent return on fresh bank deposits at end-June indicates the average return on fresh deposits mobilized or the deposits repriced or rolled over in June 2004.

Thus the depositors actually received a highly negative real return on bank deposits in June compared to January this year. The reason is that the year-on-year inflation measured by CPI or consumer price index stood at 8.45 in June 2004.

Subtract it from the 1.99 average return on fresh bank deposits (excluding those carrying zero return) during that month and you get a highly negative return of 6.46 per cent. This is a much higher negative return when compared to what people were getting in January 2004.

In January the year-on-year CPI inflation was 5.15 per cent and the weighted average return on these deposits was 1.40 per cent. Thus people were actually getting a negative return of 3.75 per cent.

In other words the actual worth of Rs1 million bank deposit was Rs996,250 at end-January 2004 but at end-June it fell to Rs993,540. This happened despite the fact that the weighted average rate of return on fresh bank deposits (excluding those carrying zero return) saw an increase of 59bps between January- June 2004. Had there been no increase in the return the actual worth of the money kept in bank deposits would have fallen by a much bigger margin.

Whereas the average return on fresh bank deposits moved up in June compared to January 2004 the weighted average return on outstanding bank deposits declined marginally.

The SBP data show that average return on outstanding deposits (excluding those carrying zero return) fell by 9bps-from 1.70 per cent at end- January to 1.61 per cent at end-June 2004.

The difference between fresh deposits and outstanding deposits is that fresh deposits include the deposits mobilized or repriced or rolled over at the end of a month but outstanding deposits are the total deposits held by banks at that time.

SBP data shows that the weighted average return on outstanding deposits fell by 13bps to 1.21 per cent at end-June from 1.34 per cent at end-January 2004.