THE State Bank’s decision to remove its minimum deposit rate requirement for conventional banks on deposits from financial institutions, public sector enterprises and public limited companies, and restrict its application to individual savers, meets the banks’ long-standing demand and must boost their profitability. The MDR rule is a regulatory mechanism implemented by the SBP in 2008 to ensure better returns — 150 bps below the SBP policy rate — for savers to increase the national savings rate. The operation of the rule covered all account holders, including government entities and large corporations, besides individual savers. The SBP has also tried to rectify the anomaly caused by the exemption given to Islamic banks from this condition at the cost of their account holders. Now it has introduced a new profit-sharing benchmark for Islamic banks, requiring them to pay a profit equivalent to at least 75pc — up from 50pc — of the weighted average gross yield of their pools to individual savers. However, the regulatory requirement of MDR has failed to achieve the goal of enhancing the gross national saving rate that hovers between 10.5pc and 14.5pc of GDP as compared to Bangladesh’s 35pc, Sri Lanka’s 27pc and India’s 30.5pc. It has also hit the lenders’ earnings and created issues in the deployment of their deposit assets. Besides, it has created an added incentive for large corporations, which constitute the bulk of savings, to keep their profits with the banks for easy money, instead of reinvesting them in the economy. The SBP decision came after banks announced a monthly fee of 5pc on deposits above Rs1bn to reduce the ‘burden’ of MDR on their earnings. The move is expected to benefit the banks with a higher mix of large, corporate deposits. The removal of the condition will allow them to negotiate returns on corporate deposits. Yet, it will not be easy to reduce rates on corporate deposits for fear of pushing corporations towards their competitors.