Key requirement for conventional banks removed

KARACHI: In a major move, the State Bank of Pakistan (SBP) on Tuesday removed the Minimum Profit Rate (MPR) requirement for all conventional banks on deposits from financial institutions, public sector enterprises, and public limited companies.

As per previous directives, issued in September 2013, with effect from October 1, 2013, all commercial banks were required to pay a Minimum Profit Rate to be paid on all Pak Rupee Saving Deposits, will be 50 basis points below the prevailing SBP Repo Rate (Interest Rate Corridor – Floor). Any change in the SBP Repo Rate, will be applicable on the profit rate with effect from 1st day of the subsequent month.

Rate of profit was applicable on average monthly balances on all existing and new saving deposits including term deposits. However, in order to facilitate the banks, the SBP has removed this condition.

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“The Minimum Profit Rate requirement shall not be applicable on the deposits of financial institutions, public sector enterprises and public limited companies,” a circular issued by the SBP said. The instructions will be effective from January 01, 2025.

Analysts said that it will benefit banks with a higher mix of corporate deposits, as they are no longer required to pay any MDR on large deposits. Banks will now pay negotiated rates to corporate sector.

As per the 2023 annual accounts of all listed banks, the total deposit is Rs27 trillion, of which 53 percent or some Rs14 trillion are corporate deposits.

The top conventional banks with a higher corporate deposit mix are Bank of Punjab (BOP), Bank of Khyber (BOK), Samba Bank (SBL), National Bank (NBP) and Askari Bank (AKBL) in range of 65-88%. While other major banks like, MCB Bank (MCB), Bank Al Habib (BAHL), Habib Bank (HBL) and United Bank (UBL) have the exposure to 35-40%.

Analysts at Topline also believe that it will be difficult for banks to reduce rates further due to the competitive environment and the risk of these deposits shifting to alternative sources, such as investments in T-bills.

As per initial estimates, this will have positive impact on Banks earnings on average by 7 percent on 50bps reduction in deposit cost.

Copyright Business Recorder, 2024