'Bank role widens current account deficit': slated for huge loan write-offs, anti depositor stance

Banks have written off some Rs 125 billion worth of loans during past six years-2000-2006 period-against Rs 30 billion written off during 1985-1999, and larger number of loans have been written off under SBP circular No 29/2002, of which major beneficiaries are politicians and industrialists.
This was stated by Dr Shahid Hasan Siddique, Chairman of the Research Institute of Islamic Banking and Finance, while speaking at Pakistan Institute of International Affairs on the topic of 'Stabilising effects of Banks' activities on Pakistan's Economy-Special focus on Banks with Foreign Stake'.
In October 2002 National Accountability Bureau (NAB) claimed that it had recovered and rescheduled some Rs 135.5 billion worth of loans, while later SBP Governor said that only Rs 17.5 billion loans had been recovered, Shahid said.
He said that the country's economy was in a serious crisis and if creative measures were not taken to reform the economy and the banking sector, foreign remittances would dwindle and the curse of flight of capital would re-appear.
He said that banks are also in a crisis, and they should be directed to pay profit on the deposit at about one percent above the inflation rate, to encourage savings and curb poverty in the country, which would help to improve the performance of economy.
"Banks' profit during the last seven years has been gradually increasing, which attained the new peak of Rs 123 billion in 2006, against Rs 7 billion in 2000, and this huge profit has been earned on savings of millions of depositors", he added.
Although banks earned this profit on the savings of the depositors, they did not transfer proportionate profit to the depositors. It had also been noticed that during the last seven years, depositors' profit had declined to 3.4 percent in 2006 against 6.5 percent in 2000, he said.
In addition, the real rate of return, after adjustment of inflation, was 2.9 percent in 2000, while in 2006 it reached -4.5 percent (negative). If the banks paid some real rate of return to the depositors, as was in 2000, then millions of depositors would have got about Rs 600 billion more profit between 2000 and 2007.
"Banks are also not paying real rate of return to the depositors, which is exploitation of depositors' savings and an indication of inefficiency, while it is also prohibited under the Article 3 of the constitution," he said.
All rupee deposits, except current accounts, are on profit and loss basis. However, despite the tremendous increased the banks have not shared the profit, which is also a violation of the agreement, he said. He said that decline in the return on deposits by banks has also discouraged savings and has contributed to high trade deficit, current account deficit and food inflation.
Some banks have been over-active in speculative business, including stocks, where returns are high, while due to the low returns on deposits and unavailability of loans a large number of people from industrial sector also switched to stocks. Therefore, the large-scale manufacturing growth has been declining.
He said that banks' share in consumer financing is increasing, while advances to other major parts of economy including micro and agriculture sectors show downward trend.
Consumer financing advances on December 31, 2006 stood at Rs 276 billion, micro financing at Rs 11 billion and advances to agriculture sector stood at Rs 141 billion, which proves that banks' priorities are not on the right path, he added. He said that banks have discouraged saving with their policies and they also played an important role in widening the current account deficit.
Due to the declining rate of return on deposits the savings and investment gap also rose from 1.2 percent in 2000 to 8.1 percent in 2006, which is also a threat to Pakistan's economy, he said.
He said that SBP is responsible as a regulator for the banking sector. However, despite low returns on savings the SBP did not use its powers to remedy the situation.
In February 2001, SBP governor said that depositors would get high returns if the problems of non-performing loans (NPLs) were settled and, in June 2002, SBP claimed that NPLs were lowest. However, the banks did not increase the rate of return, and SBP also did not take any action against them.
He said that currently banking spread is highest in the region and heavy provisioning of NPLs and high spread would affect the economy's growth. Share of foreign banks in the local banking industry is also rising, he said, and added that presently foreign banks' share has reached 53 percent while previously, in 1995, it stood at 16 percent only.
He suggested that consumer financing should be stopped, and new foreign investment in the banking sector should not be accepted and banks be directed to open new branches in the rural areas and enhance micro financing.