ISLAMABAD, 17 March 2003 — Days when milk and honey were flowing their way may not exactly be over, but banks now have to trim their sails or get ready for rougher waters.
However, there could also be a silver lining in the travails that the banks now face. Its time for them to wake up and shed their excess baggage, trim themselves and be aggressively competitive to face the banking and financial sector ground realities of the 21st century. The central bank, State Bank of Pakistan (SPB) has been repeatedly warning about these. Why?
SBP’s benchmark discount is now down from 14 percent in July 2001 to 7.5 in November, 2002. March saw the six-month tenure Treasury Bills (TBs) tumbling down from 3.17 to the lowest-ever 2.17 percent on March 5, from an average of 6.3 percent in July 2002. The big, March 5 decline in TB rate followed 155, low-priced bids offered by commercial banks, out of which SBP picked up only 14.
The government’s 10-year tenure Pakistan Investment Bonds (PIBs) were down to a record-low yield of 4.8 percent last week.
TBs and PIBs have been a longtime favorite of easy-going commercial bankers as these were safe, secure and high-yielding instruments, involving hardly any effort.
The reduced discount rate, and lower TB and PIB yields are SBP’s signals, for nearly two years now, for the bankers to lower their lending rates in order to boost the economy. The bakers have proved to be the reluctant grooms to do so. But having none other sources to invest, rising liquidity and fear of reduced profitability have forced the banks to lower their average lending rates to 9.95 percent in January. But at whose cost?
Again the banks are not really being generous, nor they are being accommodative of the needs of the economy.
They have principally done the rate-cutting at the cost of the savers, in a country that has the dubious distinction of having one of the lowest savings rates even among the developing countries.
In fact the banks have already slashed down the profit rates to savers to a paltry 3.21 percent a year in January this year, from the already meager 4.02 percent in July 2002, according to SBP. With deposit and profit rates that low, who is going to save? SBP Governor Dr. Ishrat Hussain keeps on urging everyone to increase savings to feed the economy and attain a modicum of self reliance. But, should he not force banks to heavily slash their cost of intermediation, drastically narrow down their spread, and stop utter extravagance to raise — and not reduce — profit on deposits? If Ishrat cannot do so, he and other economic bosses of the country should forget about the national rate of savings, and let it plunge down to zero. Hasn’t his monetary policy been totally unmindful of the savers who have been left to wolves.
Remember: The inflation rate rose to 3.53 percent at the end of the first eight months of fiscal 2003. Also, can Finance Minister Shaukat Aziz still guarantee that his projection of inflation rate for the year will stay below 4 percent? Whether or not that happens, doesn’t the present situation mean that the depositors are paying from their own pockets to let banking flourish at their cost because of the negative return and erosion of their inflation-hit deposits?
An 11.3 percent monetary expansion has already taken place in the first seven and a half months of the year, according to the central bank. SBP in January raised the monetary expansion projection for the year from 10.8 to 16 percent, because it expected that substantial forex in the form of home remittances and other inflows will continue in the foreseeable future.
What has, or may, hit the banks and their profitability? One of the top global bankers and currently Pakistan’s Finance Minister Shaukat Aziz puts this in a nutsehll: “Pakistan has undergone a paradigm shift in banking over the last two years.
This challenge can alone be faced if the banks launch new products and instruments. Banks should find new borrowers and sectors, such as housing and mortgage, small and medium enterprises, farm sector financing, and consumer loans.”
In fact, the banks’ hard work had started in May, 1998 when after eight years of dollarization of the economy during which most people converted their value-loosing rupees into dollars and deposited a total of $11 billion with banks in what was called Foreign Currency Accounts (FCAs). The FCAs were frozen, as successive governments had used up the greenbacks leaving hardly $400 million as SPB’s forex reserves. The banks until then had relied on lucrative dollar business, and cared little to mobilize, or invest, domestic rupee resources, in parallel with lack of high-interest credit takeoff.
Aziz and Dr. Ishrat Hussain, are persistently urging both domestic and foreign-based banks in Pakistan to go for innovative ways in order to lend to the private sector.