EDITORIAL: In a rising interest rate environment, some commercial banks have been trying to forcefully convert the deposits of customers from ‘savings’ to ‘current’ to protect their own profits.
There is a huge difference in costs between the two types. There is zero return on the current deposits while on non-Islamic saving accounts, banks are regulated to pay 1.5 percent lower than the floor of the interest rate corridor which is 18.5 percent at the prevailing policy rate of 21 percent.
In the last few quarters, there has been a sharp increase in the policy rate and the incentives for banks to have higher proportion of current deposits have enhanced substantially.
Some banks are misusing it through mis-selling. This is similar to some banks abusing bancassurance with poorly designed products sold to consumers in the last few years either misinforming or without informing altogether. The issue has been well covered in the mainstream and social media and the regulator is noticing such mis-selling.
Now a new kind of abuse is taking place through this misinformed or forced conversion of saving accounts to current ones. There is growing anecdotal evidence.
One loyal customer who has had a saving account in a branch of a big bank for the last twenty years was enjoying regular profits on his balance. One fine day, his branch manager asked him to sign a form without any information. The poor chap signed it and stopped getting regular profits. Upon inquiring, he got to know that his account is being converted to current from saving and there is no way this can be changed within the same branch. He was tricked.
Then there are a number of examples where relationship managers are calling customers to convert the saving to current accounts, and the usual rationale they provide is that saving account is un-Islamic while current is.
The problem starts with banks’ senior management as incentives of RMs are aligned for such conversion as they get cash bonus on each case of conversion. That is just like bancassurance where the agent gets the lion’s share of first premium.
In another example, one customer tried to open a savings account in a foreign bank and the bank simply refused to do so, allowing him to only open a current account or an Islamic saving account. In case of Islamic saving accounts, the profits depositors that they get are around a one-third of what they should be getting in conventional saving accounts. One bank has lately taken 180 degrees shift to completely convert its operations to Islamic.
State Bank of Pakistan should take notice of such incidents where bank accounts are being converted to current accounts without proper disclosures and where banks are not allowing people to open new saving accounts. Numbers are demonstrating such practices — especially in the Seth-owned banks.
For example, in MCB, the share of current accounts in total deposits has increased from 39 percent in September 2022 to 47 percent in March 2023. Interestingly, overall deposits of MCB shrank by 3 percent in the last six months. This means that saving and fixed deposits accounts are being reduced while current accounts have increased.
Then the ratio of current account to total deposits for HBL increased from 35 percent in June 2022 to 40 percent in March 2023. And in the cases of UBL, ABL, Bank Alfalah and Meezan, each one has a share of current account in excess of 40 percent. In a nutshell, overall industry mix is now tilted more towards the current account. That is not good, as the poor saver, even in saving and fixed deposits is getting a return of 18-20 percent whereas inflation had soared to 36 percent last month.
SBP is running negative real rates and the incentive to saving is diminishing. On top of that, banks are extracting whatever the system is allowing depositors to get. Savings are already very low in Pakistan as compared to other countries and such practices further disincentivize formal savings. SBP should take notice of such practices and be vigilant in safeguarding depositors’ interest.
Copyright Business Recorder, 2023
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