Growth in banking not accompanied
by efficiency, welfare concerns

It appears that growth and greater activity in the banking sector has not been accompanied by corresponding enhanced efficiency and public welfare goals

By Alauddin Masood

The keen interest displayed by foreign investors in Pakistan’s banking and energy sectors raised foreign direct investment (FDI) in the country from $1.0 billion in 2002 to about $7.0 billion by the end of the fiscal year 2007.

Pakistan’s banking sector’s strong footing and tremendous long-term potential served to attract a substantial amount of FDI, which was second only to the telecommunication sector.

Acquisition of local banks by foreign banks, mergers of local and foreign banks and buying of the stocks were some of the prime modes of investment by the foreign banks.

Over 53 per cent of Pakistan’s GDP originates in services of which banking constitutes over 8.0 per cent. More strikingly, gross value added in banking was instrumental for much of the overall GDP growth (as much as two-thirds) in the last few years.  

The importance of banking sector in the national economy in intermediating savers and investors is substantial and it is continuously growing, serving the largest corporate customers in particular and the smallest individual account holders in general.

However, the growth and seemingly greater activity in the banking sector has not been accompanied by corresponding enhanced efficiency and public welfare goals. Consequently, complaints against banks abound, especially before the Banking Ombudsman. The consumer rights commission and other consumer protection agencies have also highlighted public grievances, primarily relating to the quality of service and overcharging of customers.

Most of the complaints against banks pertain to the processing delays, service inefficiencies, hidden charges, and poor disclosure practices. For example, in the first eight months of the operation of the banking ombudsman in 2005, about 40 per cent complaints filed with the ombudsman were related to consumer products, with credit cards accounting for 30 per cent of the total complaints.

Some banks have converted PLS (profit and loss) accounts having a deposit of less than Rs.20,000 into Enhanced Saving Accounts (ESA) or Azadi Accounts (AA) – freedom to rob, carrying an annual fixed profit of 4–5 per cent, without giving any intimation to the customers or giving them any choice.

Not only the arbitrary nature of this conversion of accounts looks objectionable, some banks have created dissimilar conditions among PLS account holders. A number of banks have also resorted to the collusive practice of charging Rs.50 from small account holders, having in their PLS accounts a balance of less than Rs.5,000 in the case of Pakistani banks and less than Rs. 50,000 in the case of some recent entrants in the field like NIB.

Furthermore, in a bid to improve their network of branches some banks have acquired Pakistani banks. For example, NIB bank acquired PICIC bank in the year 2007, and since then its new management has been arbitrarily raising service charges without any intimation to the erstwhile account holders of PICIC bank. To begin with, the new management of this bank immediately raised inter-city cheque collection charges from Rs.100 per cheque to Rs.300 per cheque.

Furthermore, beginning 2009 calendar year, the management of the merged bank has also levied, without any prior notice or intimation to former account holders of PICIC bank, service charge for the use of automatic tellers and an incidental charge of Rs.50 pm on deposits of less than Rs.50,000 in PLS accounts, which has now been branded as Azadi account.

When clients pointed out that the arbitrary deductions smacked of unfair business practices, a fit case for probe by the regulatory agencies and consumer protection councils, the branch officers say that these charges have been levied with permission from the State Bank of Pakistan.

What the banks seemed to be colluding to do was to make small account holders pay for the administrative expense of servicing larger account holders, in other words, transferring resources from poor clients to the relatively better-off ones. This is truer in the case of banks whose leading/majority share holders happen to be industrial tycoons.

A simple calculation would show that even if one-fourth of the ESA/AA account holders had balances below Rs.5,000, the annual service charge of Rs.600 @ Rs. 50 pm recovered from small depositors would equal to 4 per cent interest paid out to the remaining three-fourths of somewhat larger customers.

As ESA/AA scheme covered over 45 per cent of the total 25 million account holders in the country, it showed that a large number of depositors appeared to have been adversely affected by this service charge.

Interestingly, on November 5th, 2007, Pakistan Banking Association, on behalf of its 49 member banks, made an announcement that the banks had collectively decided to fix rates of profit and other terms and conditions of a new deposit account, including the fixation of maximum profit rates, ceiling of categories of accounts and the rates to be charged on such accounts, and restriction on the number of transactions. Taking suo moto notice of this forcible nature of the conversion of accounts, the Competition Commission of Pakistan imposed fines on those banks that had indulged in a collusive behaviour against the public interest and tended to adversely affect the rights of customers.

Furthermore, the inefficiencies of the banking system is reflected in the very high spread of interest rates (difference between lending and deposit rates), which denies depositors due returns.

A study made by two consultants some 15-16 years ago showed that given the interest rates and service charges, the working capital of an average Pakistani bank must double every three years. But, since the interest rates and bank charges have considerably been raised by a majority of banks over the years, it showed that some banks might be generating funds for side payments to the influential ones or for fictitious lending to be written off as bad debts ultimately.

The regulatory agencies need to take notice of the malpractices in the banking sector. Amongst others, the major malpractices include: deceptive marketing practices, misleading announcements, false advertising, hidden charges and poor disclosure practices.

Furthermore, after mergers, it should be made obligatory upon the new management to inform the account holders of the merging banks about the change and also charges for various products/services. In all such cases, the new management should also give an option to each and every account holder of the merged bank whether he/she would like to retain the account or transfer it to some other bank.