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
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
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
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
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.