For decades national saving schemes offered people,
particularly household investors and pensioners, an opportunity to earn
good-enough interest on fixed income accounts and savings certificates.
It helped fuel thousands of hearts in the country including many which
entirely depended on the interest to help meet the running expenses.
The schemes also helped successive governments to
meet the incessant budgetary deficit on the strength of these savings,
the bulk of which came from these small investors. However, the interest
rates on these schemes have been slashed by the government during the
last four years to a level which is below the inflation rate at present.
The bad news is that it would be cut further early next month because
the interest of Pakistan Investment Bonds next month to meet an IMF
condition aimed at bringing it to acceptable level. And also, because
the interest on national savings scheme is linked to interest rates on
the Pakistan Investment Bonds in principal.
As is, the average deposit rate of all banks has
already sunk to 1.45 per cent two months ago way below 1.90 end June,
1.60 end August and 1.50 end September. However, the average lending
rate which fell from 7.58 per cent at end June and further to 5.02 per
cent at end August increased to 5.20 per cent end September and further
to 5.32 per cent at end October. This shows that the banks' average
spread between their lending rates, the interest they charge on the
monies they lend, and their deposit rates, the interest they pay to
their depositors, have also increased. This also means that the banks
are in a much better position to maintain their profitability while the
depositors or the people are left with no choice but to earn less on
their deposited money.
Just how low the deposit rates have sink during the
last 4 years is obvious from the fact that the average deposit rate of
1.45 per cent is much less than the inflation rate which stood at 2.2
per cent in July-October. The worst victim of the negative interest rate
are the middle income groups, particularly pensioners, who not to long
ago find national savings scheme an attractive choice to invest to earn
far better monthly returns to help meet the expense.
One of the major factors attributed to the surge in
the average lending rates of all banks is their alacrity to provide
consumer financing which helps them earn better rates of returns than
corporate lending. The emergence of the buy-now-pay-later culture fueled
by availability of easy credit from the banks, and which has made the
leasing companies complain of the creation of an uneven level playing
field by allowing the banks take over a business which primarily has
been their domain, has lets the banks discover a market which offer much
better returns than the individual depositors, particularly small.
By now the banks are actively marketing consumer
financing including home electronics, having contracts with leading
companies as well as providing increasing auto and housing loans to buy
or renovate a house. Since consumer financing is a fairly new concept in
the country and since it requires far more risks than corporate
financing, the banks have to charge higher markup rates the cost of
which are paid by the collective depositors in accepting rates of
returns, which as evident from above has fallen below the inflation rate
to earn them a negative return on their deposits.
The inclination of the banks to increasingly compete
with the leasing companies for the consumer items and auto financing in
particular and housing loans is primarily driven by far higher lending
rates to better their profitability. Unfortunately, the ultimate victim
of the diversion has come at the cost of investors that previously were
treated more respectfully by the national savings scheme for their
individual savings which played a vital role to ensure smooth financial
operations of the economy.
The drastic reduction in interest rates has certainly
benefited the rich at the cost of the medium and the low-income groups
who helped the successive governments to borrow monies from the national
savings scheme to meet the budgetary deficit. For long, the small
depositors were eulogised by the successive governments that their
savings, no matter how small it is, contributes heavily to help build a
strong nation financially. It is a great irony, that these depositors
and their small investments, which still collectively makes the bulk of
national savings scheme, are being offered such low interest rates
because the foreign exchange have touched record highs due mainly to a
drastic increase in inflow of workers' remittances from the legal
channels and the rescheduling of foreign loans. There is a general
consensus that the negative rates of returns would encourage the real
impact of which would be felt if and when the inflow of workers
remittances starts falling, and that has already started if the first
quarter of the current fiscal is any indication.