The worst victim of the negative interest rate are the middle income groups, particularly pensioners


Dec 15 - 21, 2003



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.