ISLAMABAD, 29 March 2004 — Pakistani banks are doing a booming business. It squashes earlier apprehensions of reduced profitability. At the same time, it promises higher growth in future.
Apprehensions: The previous apprehensions related to the fact that the country is seeing lending rates that are the lowest in history, as a result of which banks are likely to face reduced profitability. However, it proved wrong, as the banks not only made it up with higher lending volumes, introduced new financial products and lending avenues, but also by cutting the profits to depositors. Interest rates on deposits, too, are the lowest in history.
Some of the banks have made a “century” - or even “centuries” - in growth and profitability, that ranged between 93 to 376 percent — something unheard in the past.
The lending rates, for instance, to blue-chip corporate borrowers went down to as low as three to four percent. But, the average lending rate for all banks in January this was 5.04 percent, compared to 9.95 percent a year earlier, according to State Bank of Pakistan. The benefits of low-interest rates, however, are not shared by business and industry across the board.
“The actual and effective lending rate for a vast majority of businessmen is still around nine percent. A very small number of top businessmen are getting bank loans at around five percent or so,” says Sardar Muhammad Ashraf, senior vice chairman of the Standing Committee on Sick Units of Federation of Pakistan Chamber of Commerce & Industry. Ashraf is also a member of the SBP’s National Credit Consultative Council that advises the central bank on credit planning and monetary policy. The average profit paid to depositors declined to 1.34 percent in January this year, from 3.21 percent a year earlier, according to SBP. At this mark, profit is substantially below the current inflation rate of 3.38 percent — which is rising. The spread between the profit rates paid to depositors and lending rates charged to borrowers has narrowed from 674 to 370 basis points by now.
What fed the banks? The ever-growing deposits, fed the high turnover of banks. The deposits came coming even though the profits paid declined almost next to nothing. That has prompted widespread criticism because the private savings could disappear in the long run. The saving rate in Pakistan is already rated as one of the lowest in the world. Other factors that led to the record highest profitability and growth were: reduced treasury rates at which banks can borrow from SBP, a record lending especially to the private sector, high capital gains on bonds and investments in bourses and equity, and a major increase in deposits. Investment in shares at the bourses spiraled as the stock index rose 260 percent in the last 26 months. At the same time, several of the blue chip corporates declared high dividends ranging from 20 to 60 percent. Unilever Pakistan, a subsidiary of its UK parent company, for instance, has declared a 252 percent dividend for the year ended Dec. 31, 2003.
The bank lending, to private business, in eight months to March 6, rose to a record high of Rs. 231.5 billion , more than tripling from Rs.70 billion in the like period of last year. The government borrowing in this period was Rs. 85.7 billion mainly to repay $1.0 billion expensive foreign debts. The lending to private sector in whole of fiscal 2003 was Rs. 166.64 billion.
SPB Governor Dr. Ishrat Hussain, sees “absolutely nothing worrying in the private sector credit having risen” by more than Rs. 231 billion in the first seven months of this fiscal. He also disagrees that nearly a 15 percent growth in industrial output in the first six months of this year — on the back of large credit disbursement to private sector, including consumer loans, are a sufficient reason for SBP to consider increasing interest rates. The current inflation rate is “a temporary phenomenon. Interest rates are a demand-supply phenomenon and not controlled by SBP. If banks are uneasy about by the present situation, they are free to raise corporate and consumer lending rates,” Hussain says.
The record lending — and at the lowest interest rates in Pakistan’s history — is fuelling inflation and raising criticism, on three counts:Inflation rose 3.38 percent in seven months to January 2004, against the government’s revised projection upward to 4.2 for whole of fiscal 2004. Actual inflation may surpass it. Its impact: It is raising cost of living at a time when the overall wages are sticky. The business and industry are enjoying historically low-interest rates, resulting in lower cost of production, but its benefits have not been passed on to the consumers. Instead, common people are facing the crunch of rising cost of living.
Foreign and Pakistani banks’ financial results for calendar 2003, just unveiled, make it a “very special year.” Profit After Tax of 13 privately owned banks totaled Rs. 9.4 billion during 2003 — an increase of 119 percent over 2002, when the profit was Rs. 4.3 billion. The PAT and other financial indicators in 2002 itself were better than 2001. Profit Before Tax of these banks rose to Rs. 14.8 billion — or 94 percent compared to Rs. 7.2 billion in 2002. This is partly explained by the fact that the bank profits were taxed at 44 percent in 2003 rather than 47 percent in 2002. Finance Minister Shaukat Aziz, himself an international banker for 29 years who served as Citibank head in 10 countries and regions, is committed to further reduce tax on bank profits to equalize them with corporates. PBT rose also because banks’ capital gains from stocks are tax-free.
