SBP asks banks to pay minimum 5 percent profit on savings, PLS deposits

The State Bank on Thursday instructed banks to pay a minimum profit of 5 percent on savings, profit and loss saving products. The central bank's step is aimed at encouraging people to save more and cut their spending. The SBP increased its key discount rate to 12.0 percent from 10.5 percent, effective on Friday.
KEY DISCOUNT RATE RAISED TO 12.0 PERCENT FROM 10.5 PERCENT: Earlier, in the last monetary policy, the State Bank had taken some steps to raise saving ratio and in this connection exempted one-year maturity of banks for the Cash Reserve Requirement. However, not many fruitful result of this exemption were witnessed in the banking sector while inflation continued to rise.
The SBP said that effective June 1, 2008, all banks are required to pay a minimum profit of 5 percent on savings and PLS products. Speaking at the press conference here on Thursday, SBP Governor Dr Shamshad Akhtar said that the impact of any increase in the discount rate by SBP is immediately transmitted through advances; however, there is little impact on the deposit rates and hence, there is no incentive for the currency in circulation to move into bank deposits.
"In 2008, given the low returns, the growth of deposits has been impacted thereby affecting the capacity of the system to service growing economy wide requirements and this measure is also necessitated by the slower growth in overall deposits," she added.
The saving deposits category accounts for more than 43 percent of all bank deposits and constitutes 63 percent of the total number of countrywide deposit accounts, she said.
While margins on deposit rates have risen, given the stock of deposits on which returns remain low, the average return on all saving accounts is at 2.1 percent. She said that the inelasticity of the deposit rates had made the transmission of monetary policy signals and stance less effective. The SBP has been relying on moral persuasion and competition among banks to encourage rise in returns on deposits.
Though this has facilitated greater awareness in banks and differential and higher returns by smaller banks, increment on deposit rates has happened by and large principally for large deposit holders, she said. The rise in deposit rates will help bring high level of currency in circulation into the financial intermediation process and allow banks to have higher level of resources to serve the credit requirements of the economy, she added.