June 02 - 08, 2008

Since State Bank of Pakistan has in monetary statement released in May this year bound all banks to pay a minimum profit rate of 5 percent on all saving deposits, banks have come into active mode to revise their profit sharing formula with few bankers having apprehension against the direction of increment on deposit rates. They contend that difference of lending and return's rates should be shortened to a reasonable equation.

During recent years, low returns on deposits detached numbers of depositors off banking system, stalemating growth in banking deposits, confining it to mere facilitation of credit servicing. State bank took the measure to bring currency in circulation into the financial intermediation process through provision of incentive in the form increasing profit on saving deposits.

Ostensibly, commercial banks prefixing 2 to 3% tier on saving accounts may feel the pinch of new limit of 5% return on deposit while many other banks already offer near or above the new rate. Barring few banks whose rate of return hovers around 5%, the fresh obligation will get banks into realigning profit sharing policy for account holders. According to State Bank this increment has principally occurred for large depositors.

"This policy becomes a subject to interpretation of banks," said Muhammad Azeem Naiyer, Sr. Vice President, Habib Bank Limited. He said this rate of return is not practically viable for banks. The limit set for rate of return would double the prevalent rate of average 2.1% in hurry missing pragmatism and would undermine bank's profitability. Cost of banking operation may increase. But he thinks, "Implementation is not much easier."

At usual, concomitant rise in discount rate, CRR, and SLR has resulted into increase in lending rate. Basically, CRR is tasked to control excess liquidity in the market. This time simultaneous bps gaining to SLR has also stopped banks from liquidating their investments, which they use to ease flight of liquidity. Variable margin on floating debts lessens impact of discount rate hike on banks" profit line. Instead, lending interest rate has not been increased at par with deposit rate so to have made wide disparity between the two, said he, adding another burden of return on deposit may jeopardize the operational efficacy of banks.

Compounded with spike in CRR and SLR trenches, liquidity management may become difficult for banks following impending application of ceiling on rate of returns and they would less likely be in a position to offset additional profit loss in any way, he underscored.

He presumed that deposits in banks may increase in effect; however, investors of equity or capital market would not throng at banks" fronts as they still are pocketing over 10% profits on marketable securities. He disproved buzzing whispers about potentiality of restructured depositor's accounts to siphon off equity market investment. "It is not possible," he maintained. According to State bank, saving deposits category account for more than 43 percent of all bank deposits and constitute 63 percent of the total number of countrywide deposit accounts.

JS Research department phrased in its report titled 'Pre-Budget 2008-09', 'Overweight' stance on the banking sector trading on attractive multiples is expected to propel its profits by 20% in 2009, even after factoring in 5% minimum profit rate on savings and KIBOR causative corrections. On the other hand growth in advances despite draw down in consumer financing and uptrend of high interest rate will be able to keep hooked at 10%. Too, this may be because of demand pressure of prospective and ongoing projects that require credit. Also, the research insinuated that in short term banks would be getting higher returns on KIBOR linked advances after rise in discount rate. Concurrently, in long term, it maintained, upward revision of interest rate may have produced fallout in credit flight to 8% in 2009 in contrast to initial projection of 10% in 2008.

Karim Nasiruddin, General Manager, Soneri Bank Limited said despite distribution of additional profit interspersed with 5% rate of returns banks will achieve sustainability to offset the load easily after creating advance in the month of July wherein new discount rate will be applicable on 6 months floating debts.

He believes decision of central bank will be in the larger interest of public and return on deposit needs to be rationalized. To a question, he replied, his bank will not be affected by new limit as it already gives 4% per annum return on PLS account. And, to manage one percent in exiting profit will not be difficult.

State bank introduced discount rate equivalent to 1.5%, with effect from 1st of this month, however, banks commence short term lending on 6 months biannually. Working finance or floating debt is factored in variable open market rate; therefore, even banks giving relatively low return on deposits would readily compensate lose caused by revised upward profit sharing formula. In addition, bank-lender long term agreement will be in accordance with new market interest rate. Karim says cost of lending would also be affected by increased percentage of return, but this will be around 0.75% to 1%, Like Soneri bank other banks are also yielding near or above 5% return on saving accounts.

Saving deposits in banks have since long been witnessing a higher spread that drew a thick line of price differential in-between capital borrowed and lent. The price of credit is far greater in numeric value than of deposit in spite of that in both transactions asset engages in to get back return on engagement. Previously, dual transactions had averagely equal weight. Yet it is in fact in succeeding years to 2001 that interest rates started facing anomalous differences, widening gap between lending and deposit rates. Since then credit regime has given boost to lending in entire sectors of the economy without real need-based analyses. Electronic currency has given birth to credit culture, which has changed the pattern of purchasing, infused into the society monetary profligacy.