Sky-high bank profits

LAHORE: Banking sector has been in the driving seat in recent years. It is posting healthy growth in profits on the strength of its deposit profile that favours consumerism instead of savings.

Banking spread in Pakistan is much higher than banks in India, because Indians are willing to tie up their savings for some period, while Pakistanis prefer immediate encashment of their deposits. The saving rates in Pakistan are lower because of higher consumptive deposits.

Indian long-term deposits facilitate their banks to finance long-term industrial projects. The long-term projects are financed in Pakistan through foreign loans.

Deposit profile of Indians reveals that hardly 30 percent of their deposits are in current or normal saving accounts. Current accounts can be withdrawn without any notice while saving accounts can be totally withdrawn on a week’s notice.

The rest of the accounts are in term deposits that can only be withdrawn after the completion of the term ranging from three months to three years. These deposits carry higher interest rates, while the interest rate on saving deposits is much lower than term deposits.

The banks give no mark up on current account deposits. Indian banks must give health markup on 70 percent of the term deposits which reduces profits.

In contrast, the structure of deposits in Pakistan are different. Most larger banks make efforts to get current account deposits where they pay no interest.

Larger banks do not advertise for attracting term deposits. Smaller banks do because the zero-rated loans mostly go to the larger banks.

The savings and current account deposits account for 75-93 percent of the deposit portfolio and only 7-15 percent of the deposits are for a fixed period.

Since these banks pay interest on a small portion of their deposits, they make hefty profits on total deposits.

The savings of the Pakistani consumers are tied either in gold or real estate and in few cases in stocks. Since term deposits stay with the banks for longer term, they can finance long-term projects.

With deposits that can be withdrawn at a short notice, the banks prefer to give working capital loans mostly. The markup on working capital loans is much higher than the project loans.

They make most of their money by investing in short-term treasury bills of three to six months duration.

Banking in Pakistan is different from banking in other countries where banks come up with products to attract long-term deposits. Long-term deposits are a sign of stability in the banking system.

The zero-rated loans make banking risky. If we go through the annual results of all larger banks, they all feel pride in informing their shareholders that they have increased the zero-rated deposits.

The service charges of the banks have also increased abnormally. For years banks were providing ATM receipt to depositors free of charge. Now they are charging Rs2.5 whenever the customer demands a receipt.

The ATM charges if a transaction is conducted from another bank have been increased from Rs15 to Rs17.

If a depositor of bank A uses ATM of bank B and the transaction cannot be completed because of a flaw in the system, the depositor must pay the usage charges.

A decade back, interest income was the main source of revenue for the banks, but now the service charges generate more revenue.

Banks are now fully aware that because of fintech platforms like Paypal, Apple Pay, and Google pay etc, ‘pay’ has emerged as an alternative to, say, credit card payments or direct deposits.

These payment vehicles have not yet affected Pakistani banks, otherwise they will start reducing their service charges to keep the customers. They will soon be confronted with fintech products and then strive to retain the consumers to traditional but revamped banks.

That is happening in a world full of innovative devices. In emerging markets where banks have far less reach, for example, new platforms can be exploited to serve the unbanked market as well.

Mobile devices are being increasingly used in Pakistan for payment services. The apps developed by experts are easy to use even by the least educated population.

The mobile devices are not a substitute, but an enhancement of the payment process. It acts as a facilitation for the population that has no access to banks.

Regulations are still a challenge for this portion of fintech, especially those with a social media component.