KARACHI, Oct 22: Banks are ready to reduce their lending rates after a huge 2 per cent cut in the State Bank discount rate. But the lowering of their lending rates may not correspond with the cut in discount rate.

“We are working on the nitty-gritty of our plan to cut lending rates,” said senior executive of a state-run bank. “But it is too soon and too difficult to give numbers.”

Senior executives of other state-run and private banks made a similar statement: they are ready to cut lending rates but that might not commensurate with the reduction in the SBP discount rate.

The reasons are obvious. Banks cannot cut costs overnight. The lowering of SBP discount rate would enable them to borrow money from the central bank at a cheaper rate. It would also give them access to cheaper call money from within the inter-bank market.

“But to make a meaningful cut in our lending rates, we need to cut down the deposit rates as well and that is a difficult thing to do,” said head of a state-run bank who declined to be named.

Banks already owe a cut in their lending rates in response to a 2 per cent cut in SBP discount rate in July-August this year.

The SBP had lowered its discount rate from 14 to 13 per cent in July and then to 12 per cent in August. But instead of coming down the average lending rate of all banks rose from 13.74 per cent at end-June to 14.07 per cent at end-August.

Now after the lowering of SBP discount rate from 12 to 10 per cent, banks are rather more obliged to cut their lending rates.

Unlike in the developed world where a cut in the discount rate of central bank is instantly followed by rate-cuts by banks, the banks operating in Pakistan respond to any change in SBP discount rate with a time lag. Sometime it takes banks months to do this.

It depends largely on the room available for lowering deposit rate because the banks burdened with heavy bad debts find it very difficult to cut the cost of intermediation.

Since the average deposit rate is too low — 4.96 per cent at the end of August — banks can hardly lower it further. That leaves them with little option to create room for lowering their lending rates.

At end of August non-performing loans of all commercial banks stood at Rs152 billion or about 19 per cent of their advances. The NPL of three state-run banks alone was Rs100 billion or one fourth of their total advances. Non-performing loans are the loans whose principal or mark-up or both are overdue by more than 90 days.

“This heavy drag of NPL blocks any move to cut lending rates,” said head of a state-run bank. He said over-staffing in state-run banks and a high tax rate on banks income were also responsible for high cost of operations of the banks making it difficult for them to respond quickly to a downward revision in SBP discount rate.

Since 1997 three state-run banks namely (i) Habib Bank (ii) National Bank and (iii) United Bank have sent thousands of their employees back home and shuttered down hundreds of their loss- making branches. Plans are afoot to close more branches and lay off more employees. “Why on earth the banks are still unable to cut costs and create room for lowering of lending rates,” questions Vice Chairman of All Pakistan Textile Mills Association Mushtaq A Vohra. So far tax rate is concerned the government has lowered it from 58 to 50 per cent effective from next fiscal year and stands committed to make further cuts in it.

The fact that the spread between banks lending and deposit rates stood at 9.11 per cent at end-August up from 8.74 per cent at end-June speaks volumes about the inability of the banks to cut their costs. The State Bank Governor Dr. Ishrat Husain has been on record saying that the rising gap between lending and deposit rates of the banks is a matter of concern for the State Bank.

But needless to say that in an opening-up market like that of Pakistan, it is not the business of the central bank to dictate banks on how to correct the interest rate structure. The central bank can only send signals to them by changing its discount rate or by changing the yield on government security papers like T- bills.

The SBP has sent very strong signals to banks by lowering its discount rate by 4 per cent since the beginning of this fiscal year that they must make cheaper credit available to the private sector. That is essential for pulling the economy out of slump.