The State Bank has removed the Minimum Deposit Rate (MDR) restriction for all conventional banks that accept deposits from lenders, public sector businesses, and public limited corporations.
Two circulars for conventional banks and Islamic banking institutions (IBIs) were released by the State Bank on Tuesday. The circulars contained a number of IBI-specific directives.
The SBP implemented the MDR as a regulatory tool to guarantee that depositors of traditional banks receive a return that is 150 basis points lower than the current policy rate. As long as the benchmark interest rate stays at 15 percent, all traditional banks are required to give depositors 13.5 percent. This rule does not apply to Islamic banks.
The central bank claims that the MDR will now only apply to deposits made by individual account holders.
According to the circular, deposits made by financial institutions, public sector businesses, and public limited corporations are exempt from the Minimum Profit Rate (or MDR) requirement.
The revised guidelines for MDR removal will take effect on January 1st of the following year. Since banks are no longer obligated to pay any MDR, banking experts believe that the decision will help those banks with a larger proportion of corporate deposits. The minimal returns that the banks were required to pay were less than 1.5 percent of the policy interest rate.
The banks will now have the ability to bargain with commercial banks, public limited companies, and public sector organizations over the minimum rate.
However, according to bankers, the State Bank has protected the people because MDR will continue to be in effect for private deposits.
