KARACHI (March 26 2003) : Banks may be obliged to close millions of accounts unless the State Bank of Pakistan withdraws its regulation that “non-remunerative deposit accounts and accounts opened on Profit & Loss sharing basis shall not be subjected to the levy of any service charges in any form whatsoever”, it is reliably learnt.
There are over 28 million deposit accounts, of which around 22 million are said to be (PLS) saving accounts.
Eighty percent of the PLS accounts have balance of less than Rs 10,000, which account for only two percent of the total deposits.
Depositors having balance of Rs 100,000 and above constitute over 85 percent of the bank deposits.
It is said that some clauses, under SBP's Prudential Regulation XIII, in its current form deny the banks in Pakistan a basic right to charge for its processing effort, without denying the customer the right to shift business elsewhere.
Secondly, this regulation allows a bank to place a minimum balance condition along with service charges/penalties, if it is specified in the account opening form. Most new banks have incorporated the necessary terms and conditions (T&C) as required by SBP.
Old banks with large networks, however, are placed at a disadvantage against newer private banks, as SBP requires them to obtain written consent from their old account holders, numbering in millions, before amending the T&C agreed when the accounts were opened.
The required process is not only costly (in terms of time and money) and is said to be impracticable but also ejecting customers is deemed to be un-business-like.
According to banking experts, banking services to low-income savers do need to be subsidised but this subsidy has to be commensurate with the capacity ie income of the bank which is now in a nosedive.
The lending rates are at their lowest level in fifty years. In 1947, the interest rates were said to be around six percent but now good customers are availing financing at 2.5 percent.
In a low interest rate environment, the big banks are becoming less competitive and their ability to adjust to changing market conditions is being hampered, say the bankers.
“Once their investment in Treasury Bills, purchased when the yields were around seven/eight percent (at present the yield on new sales is even below the inflation rate-3.5%) mature the financial strength of these banks would start deteriorating.
Not only that this is dangerous but also an uncompetitive banking sector would retard the real sector (agriculture and industry)”, warn the bankers.
It is said that SBP regulations restrict the older banks in adjusting to changing market conditions with respect to existing customers.
Banks need to be respond to these changes and amend the terms and conditions, without being forced by SBP to incur the cost of communicating with millions of customers for each successive change and obtain a positive consent before initiating account closure.
Bankers point out that it is not good commercial practice in any business to ask customers to go away.
“In most businesses, suppliers determine price and leave the customers the choice to accept or walk away. Secondly, all over the world, employers having mandated small salary recipients to open bank accounts, pickup the service charges on the employees account, and if SBP is concerned about the political criticism on the levy of charge on small deposit account, the outcry on mandatory account closure would be far more”.
They say the banking regulators needs to have a positive approach to the issue. Banks all over the world charge on every service rendered such as: drafts, remittances sent or received etc.
These charges are waived on remunerative accounts only as a concession, since the bank is making more revenue from the high volume customer.
Charges for teller services are always higher than the charge for conducting a transaction through an automated teller machine (ATM) and there is also a hefty charge for handling cash in bulk.
In Pakistan 70 percent of the total transactions are in cash. Even after accounting for the income from float on balances below Rs 10,000 banks are suffering a huge net loss.
This at present is being met by overcharging good borrowers and giving lower return to good depositors, as well as under-paying staff.
Foreign banks are requiring a minimum balance of Rs 25,000 and in some cases Rs 50,000 and their schedule of charges includes every conceivable service including photocopying, account statement, levy on check return and bulk cash handling and their salary structure is much better than that of the local banks.
Banks want their fee income to fund their operational expenses.
This would allow them to reduce the spread between loans and deposits and at the same time improve the return to the depositors.
They say this would also improve the saving rate in the country which has fallen from 14 to 11 percent of the GDP.
They want the SBP to allow them to publicise their terms and conditions in newspapers as well as display their revised schedule of charges including penalties, if any, at prominent places in their branch for the account holders instead of communicating with millions of customers through notices and letters.
In the meanwhile, it is learnt that some banks have already started the process of writing letters/notices to individual customers to inform them that if no response was received within a stipulated time it would be assumed that the revised terms of charges/penalties and no profit on deposits below the minimum balance requirement are acceptable to them.
A comparison of balance sheets of Pakistani banks with overseas banks clearly shows that their fee base income is less than 25 percent of their total revenue while in overseas banks it is 65 percent or more.