IS THE BANK'S SPREAD JUSTIFIED?
SHABBIR H. KAZMI
June 6 - 12, 2011
The average spread earned by the commercial banks in Pakistan hovers around 7.5 per cent, almost three times the average earned by their counterparts in many other countries. This kind of fabulous return is made despite billion of rupees turning delinquent every year and billions also written off. In other words, a bank sponsored by real entrepreneurs and managed by the professionals must have been earning far higher and sharing the benefit with its employees and shareholders, but somehow the other clients, particularly the small savers remain 'untouchables'. Not only that they are paid a negative return on their deposits, when compared with high rate on inflation in the country, but are not given any facility or benefit for keeping their money with the banks.
Without any exaggeration while 'foreign qualified and trained bankers' set up even minimum balance requirement in the 'nationalized banks' the new private sector banks didn't make this mandatory. The so called banking experts were saying that in case of small accountholder the cost per transaction was 'too high' and therefore traffic of these customers has to be discouraged.
As against some of the newly established banks not only waived off minimum balance condition but even went to the grass-root or school banking. They would have never gone for this unless it was 'profitable' business.
According to some of the retired bankers, "it is generation gap, we as bankers used to treat every accountholder very nicely but today's bankers want to deal with 'big businessmen' and follow centuries old saying I scratch your back and you scratch mine, meaning they extend favor only to receive favors. One of the latest policies followed is that if you give me deposits worth Rs100 million, I will extend you double the credit limit."
There is yet another group of bankers who say, "Let us invest money in government papers and share of the blue chip companies rather than extending credit". Not only the return offered on the government papers is exorbitantly high but also risk free. This is evident from overall investments made by the commercial banks in Treasury Bills, Pakistan Investment Bonds and lately launched Sovereign Ijarah Sukuk.
Till lately banks were maintain huge investment portfolio. However, when these investments limits were almost busted they went for sponsoring asset management companies. Now almost all the banks have asset management companies, which also invest in equities, debt instruments and government papers.
According to a banking sector expert, while in India the maximum permissible limit for investing in the shares of public limited companies is six per cent of shareholders' equity the actual investment in Pakistan hovers around 25 per cent of shareholders' equity.
Actually, there is nothing wrong with following one or the other policy but the focus of banks should always remain on small savings. Small accountholders have billions of deposits but actual lending to them is a very negligible percentage. Bulk of the borrowing is done by the large corporate entities. In Pakistan, textile and cement companies are the biggest borrowers, also contribute the largest percentage of non-performing loans, but hardly pay any dividend to their shareholders. In some of the cases, nearly 80 per cent of total income is eaten up by the interest payment.
Certainly, the sponsors of such companies are not running the businesses to pay interest to the banks. Some of the common observations are: 1) funds are borrowed in the name of a listed company and then invested in associate private limited companies and 2) shares of other public limited companies are purchased and again pledged with the banks for borrowing more and the vicious circle continues. In other words, more and more business enterprises are created on borrowed amount. Since the banks still manage to post modest profit, the managements and board of directors are contended.
Some of the banking sector experts term banking as 'wata sata' business in Pakistan. Since most of the banks are operating in the private sector, they have formed a 'cartel'. Under the arrangements, these extend credit to each other, and 'most of the money remains within the families'. Therefore, the rich are getting richer and poor are getting poorer.
Another point is that banks mostly cater to the needs of manufacturing sector and hardly any amount is provided to agriculture, small and medium enterprises and the individuals. Even if small sums are extended to these types of borrowers, the interest rate charged is fabulous. At an average, the interest rate charged from individuals, farmers, SMEs and microenterprises is above 36 per cent.
Most neglected are the farmers. This year the State Bank had set agriculture loan target of Rs270 billion, which was minuscule keeping in view the overall contribution of the sector in the GDP. In fact, the banks should have extended more money to the farmers in the aftermath of floods for the purchase of seed, fertilizers, and other inputs.
There is a dire need to bring down the average lending rates for the priority sectors i.e. agriculture, SMEs and microenterprises. These are the driving engines of Pakistan's economy. Other countries have enhanced their DGP growth rate by focusing on consumer and housing finance, SMEs and microenterprises.
In case of Pakistan, special emphasis has to be given on agriculture achieving two basic objectives 1) achieving food security and 2) boosting GDP growth rate by focusing agriculture. Achieving food security can save billions of dollars being spent on food and edible oil import and country can also earn huge foreign exchange by exporting what, rice, corn and even sugar.