The SBP has linked minimum deposit rate on PLS saving accounts with the interest rate corridor-floor (repo rate)

The State Bank of Pakistan’s decision to link the minimum profit rate on saving account with repo rate will impact some 25-30 percent deposits and an additional cost of some Rs 10 billion annually to the banking industry, according to an analysis report prepared by Topline Securities.

In a major development, the SBP on Friday has made profit rate on saving account variable so that depositors of savings account, constituting 37 percent of total deposits, could enjoy benefit of rising interest rates.

The SBP has linked minimum deposit rate on PLS saving accounts with the interest rate corridor-floor (Repo rate). Effective from October 1, 2013, banks are now liable to pay at least 50bps below SBP repo rate (which is 7 percent now) which will effectively increase minimum return on saving deposits by 50bps to 6.5 percent.

“In future, whenever policy rate (reverse repo rate) is adjusted, this minimum return on savings deposits will also increase or decrease in that direction, assuming corridor to remain same,” the Topline report said. This also restricts banks margin in rising interest rate environment, it added.

According to the report, the move is another attempt by the SBP to provide adequate compensation to depositors and control declining Pak rupee. However, from a different angle it seems that the SBP is piling pressure on banks to change their current focus from investing in risk-free government papers to high yield advances to jump-start private sector credit off-take.

 

“We estimate that out of the overall deposits in Pakistan of Rs7.2 trillion (US$68bn) around 37 percent (that are Rs2.7 trillion) are saving deposits,” said analyst at Topline Securities.

Within these saving deposits, around 70-80 percent are earning 6 percent minimum return on average balance. However, these ratios vary from bank to bank as large banks have higher proportion of savings deposits at minimum return while this ratio is little lower for smaller banks, he added.

“To calculate additional costs to the banks, we assume that 25-30 percent of their total deposits are expected to be impacted by 50bps increase in minimum deposit rate. This will cost an additional Rs9-11 billion a year to banks assuming deposit structure to remain same and banks will not pass on the impact to their borrowers,” Representative said.