October 27, 2001	Saturday	Shaba'an 9, 1422

KARACHI, Oct 26: Banks may reduce their lending rates for the customers in phases after the two per cent cut in the State Bank discount rate last week. But they had to cut down KIBOR or Karachi Inter-Bank Offered Rate accordingly from the next working day.

On October 20 the SBP lowered its discount rate from 12 to 10 per cent to kickstart the economy — and on October 22 KIBOR came down by almost the same percentage points. October 21 fell on Sunday.

Senior bankers say KIBOR is still on the fall. They say that six-month KIBOR slipped to 8.6 per cent on October 26 from 10.7 per cent on October 20. Three-month and one-month KIBOR also fell to 8.2 per cent and 7.6 per cent from 10.40 per cent and 10.3 per cent respectively.

KIBOR is the average interest rate at which 21 major local and foreign banks lend money to each other. Though KIBOR is yet to become a real benchmark for inter-bank lending rates in Pakistan, it serves as a barometer of the market liquidity.

The SBP has already been using it as such and has made adjustments in the treasury bills yield in the past seven weeks keeping KIBOR in mind.

Banks had launched KIBOR on September 7 in an effort to set a bench-mark for inter-bank lending rate. The members of the KIBOR club include (1) ABN Amro (2) ABL (3) American Express (4) Askari (5) Citibank (6) Credit Agricole Indosuez (7) Emirates (8) HBL (9) MCB (10) NBP (11) Standard Chartered (12) UBL (13) Union Bank (14) Bank Alfalah (15) Societe Generale (16) Mashreq Bank (17) Prime Bank (18) Hong Kong Shanghai Banking Corporation (19) Deutsche Bank (20) Habib Bank AG Zurich; and (21) Metropolitan Bank.

Senior bankers say the 2 per cent cut in the SBP discount rate immediately reflected in KIBOR for two reasons: (i) KIBOR is meant only for clean lending in the inter-bank market and (ii) a bank has the right to refuse to lend at the rate it offers under KIBOR regime if the amount to be lent is higher than the ceiling it has set for the borrower bank.

Banks set lending limits for other banks keeping in view their financial health and the ability to repay on time. Bankers also say that since the rates quoted under KIBOR regime are valid only for five minutes, most banks can easily revise the quotes for a particular borrower. Besides not very large deals are struck at the rates quoted under KIBOR regime because banks can quote rates for as small an amount as Rs50 million. Bankers say though there is no upper limit for the amount, banks normally avoid to quote rates under KIBOR for larger amounts also because they are supposed to quote two-way prices with the spread not exceeding 50 basis points. All this technicality involved in KIBOR regime makes it less effective and less representative of inter lending rate.

But bankers and businessmen say it is a good beginning and may eventually establish itself into a true benchmark rate like LIBOR or London Inter-Bank Offered Rate.

The fact that banks in Pakistan do not respond immediately to the changes in the SBP discount rate makes it difficult for the policy makers to achieve the desired result of revisions in the monetary policy. It also causes anxiety among business circles that expect banks to be as quick in cutting lending rates after a cut in SBP discount rate as banks in the other parts of the world do.

There are several reasons that restrain banks from doing so— including high taxation rate; higher cost of intermediation and still high drag of the non-performing loans. But most bankers agree on one thing. Banks can respond more quickly to the changes in monetary policy if they formally introduce the idea of prime lending rate. The neighbouring India has this thing in place for years.

Whenever Reserve Bank of India makes a change in the monetary policy, it immediately impacts in the prime lending rates of the banks.