Bank race begins to fetch deposits: some offering profit in advance

[Naveed Yaseen]

By Shahid Iqbal
KARACHI, Oct 18: The persistent liquidity crunch has forced banks to launch innovative products to attract deposits which are being withdrawn instead of keeping in banks.

Banks are preparing to pay profits in advance to depositors, which they believe would restore depositors’ confidence and stop outflow of liquidity from banks.

The meltdown of financial system in the US and Europe has still not entered with a full impact in Pakistan, but penetrated into the banking system, creating a liquidity shortage.

Bankers say no bank has defaulted and no apparent panic is visible in Pakistan, but the liquidity has flown out of the system, making it difficult for banks to run their day-to-day affairs.

The State Bank has taken a series of measures, and the latest step was taken on Friday when a total liquidity of Rs270 billion was pumped into the system.

Meanwhile, the Allied Bank took lead by launching new products on Saturday which offers profit in advance over deposits.

The bank said it would pay Rs14,000 in advance over a deposit of Rs100,000 fixed for 15 months.

The SBP governor in a media conference on Friday had indicated that such products were being launched by banks in Pakistan to attract deposits.

Banking sources said that more such products were in the pipeline.

“Pumping of liquidity by the State Bank is not enough as banks, especially small banks, are still in a trouble,” said a senior banker.

The State Bank, despite pumping Rs180 billion on Saturday, carried out Open Market Operation the same day and injected Rs5.448 billion for seven days.

The SBP had already pumped temporary liquidity of Rs300 billion through OMOs since the beginning of liquidity crisis.

The banker was of the view that every bank would have to come out with new products like return on advance to boost confidence of depositors.

“We can offer more in advance on deposits for a year,” said the treasurer of a large Pakistani bank.

He said that competition to attract liquidity could benefit depositors to get even Rs16,000 to 17,000 in advance for fixing liquidity for one year or more.

Bankers said no confidence-shaking incident happened in Pakistan, no bank defaulted and no bank refused to pay back to depositors but still confidence shattered only because of what is happening with giant banks operation on global level.

No foreign bank operating in Pakistan showed any signs of winding up of its operations or closing down branches, though, some of them are in a deep trouble, particularly in England where the government bought stakes up to 60 per cent in banks.

An analyst said that foreign banks which have massive exposures of derivatives, hedge funds, real estate and stocks in the US and Europe market, have no such investment in Pakistan which ‘means they are safe at least in Pakistan.’

Pakistani bankers did not see even remote chances of making risky investments, like stocks and real estate.

“The question is how to assure depositors that their hard-earned money is safe despite no losses incurred by Pakistani banks in the recent turmoil,” said the banker.

He was of the view once the financial system meltdown completes its course, it would restore confidence in banks in Pakistan too

http://www.dawn.com/2008/10/19/ebr3.htm