If trimming the elevated banking spreads were the solution to inculcating a culture of savings in Pakistan, the saving-to-GDP ratio would have been well above the range of 10-12 percent, it currently stagnates at. Despite the fact that banking spreads have shed around 600 basis points since CY09, standing at the eight-year low of 6.21 percent in January 2013, savings-to-GDP ratio is riding a downward trajectory, remaining lower than the rest of the world. This shows that savings have never been Pakistans specialty regardless of the interest rates. And that there are other exogenous factors that need to be tackled to enlarge the savings graph. To further fade away the savings scenario, the saving-to-GDP ratio of 10.7 percent also takes into account the savings drummed up via informal channels such as ballot committees. According to World Bank, barely 14 percent of Pakistanis use a financial product from a formal financial institution as against 48 percent in India. With inflation lingering well above the deposit rates, it should not be surprising that an average Pakistani prefers to spend whatever he earns or exits the banking system in search of higher returns - a major contributory factor to Pakistans growing informal economy. The spreads, albeit have dropped substantially, but still remain in the highlands when compared to developed economies. This shows that Pakistani bankers are guaranteed a substantial profit on every rupee they lend out. A senior banker told BR Research that the lending mandates don permit them to risk the depositors money, hence they either charge high risk premium when it comes to private sector lending or look for safe-haven in the form of government securities. However, the current situation has exhausted both the earning avenues. A regular reduction in the discount rate, coupled with minimum deposit rate frozen at six percent, is tightening the noose around banks profits. Constantly thinning spreads might force the banking sector to swerve its attention from risk-free government securities to risky private sector advances. However, credit appetite of the private sector is sluggish, owing to exogenous impediments - law and order situation, power crisis etc, thus depleting both the earning alternatives. Such circumstances are encouraging banks to look for new ways to diversify their income. For instance, UBL is tapping the international market with 27 percent of its gross advances being payable outside Pakistan and 28 percent of its deposits being in foreign currency, according to InverstCap Research. This not only shields the bank from the uncertain political situations in Pakistan but also is expected to lessen the impact of recent change in profit calculation on savings account. Effectively, the central banks steps to trim bank spreads and lower the cost of borrowing have driven banks to innovate. But this innovation is largely targeted at maintaining banks profitability; not increasing lending to the private sector or shoring up deposits. To achieve the goals of boosting savings and incentivising banks to lend to the private sector; the SBP needs solutions that reach beyond fiddling with the discount rate, minimum return on deposits, etc. The Credit Guarantee Schemes, initiated by SBP in 2010 which covered a substantial portion of the borrowers credit risk, thus enabling small enterprises and farmers to access bank financing worth Rs2.83 billion over the last 18 months, has been a viable option. Perhaps it is time for similar out-of-the-box solutions from the central bank.
======================================================= Trend in Banking Spreads ======================================================= Real Real Period Spreads CPI Growth Lending Deposit % % Rate % Rate % ======================================================= 2009 7.478 10.5 3.483 -0.972 2010 7.457 12.89 0.499 -1.524 2011 7.633 11.97 1.662 -1.635 2012 7.023 9.73 3.050 -1.267 =======================================================Source: SBP Economic Data