KARACHI, March 1: Lack of stability in the interest rate in the inter-bank market refrains banks from lowering their lending rates on time. Central bankers say the State Bank does realize this and is taking steps to keep the interest rate stable in the inter-bank market.

“Interest rates in the inter-bank market remain unstable most of the time,” laments treasurer of a state-run bank. “This stops banks from responding timely to the changes in monetary policy and leaves the banks unable to cut their lending rates when they should.”

The business community has long been demanding a cut in banks lending rates. Many of them feel cheated by the bankers when they do not see the lending rates fall in response to progressive rate cuts by the State Bank. The president of the Federation of Pakistan Chambers of Commerce & Industry Iftikhar Malik has once again appealed to the SBP to take steps to bring down the lending rates of the banks.

But central bankers say the SBP has done much of whatever it could have to facilitate the banks to cut lending rates. They cite a four per cent cut in discount rate in the first half of this fiscal year and another one per cent slashing in January supported by matching cuts in treasury bills rates. But banks have responded reluctantly and reduced their weighted average lending rates by only one percentage point to 13.41 per cent in July-December 2001.

Heads of banks give several reasons in defence of their less- than expected rate-cut including (i) large bad loans (ii) overstaffing and (iii) high rate of income tax etc. “But a more practical reason is that the central bank has done little to keep inter-bank interest rates stable,” says treasurer of a big local bank. “How can we readjust our lending rates if the inter-bank interest rates continue to fluctuate too wildly and in too vast a range”? He does not sound off the mark. Only recently the inter- bank money market has seen overnight lending rates fluctuating between 1-9 per cent.

Ideally these rates should fluctuate in a much narrower band with the spread not exceeding 2-3 per cent. Only then banks can timely decrease or increase their lending rates — as the case may be.

“We do appreciate this point,” said a senior central banker who refused to be named. “Lately we have made moves to ensure interest rate stability in the inter-bank market,” he said and referred to the three open market operations conducted within this week. “You must have noticed that in all the three OMOs we kept the rates of return unchanged to signal to the market that we mean business now.”

The SBP injected Rs5.7 billion in these OMOs but at the same time mopped up Rs5.2 billion thereby offsetting the impact of the injections. “Had the market behaved and the offers received for reverse repo of T-bills would have been closer to the levels we were looking at the injections could have been much larger,” said the central banker.

“As a matter of policy the SBP will continue to take measures to ensure interest rate stability in the inter-bank market but we have a long way to go.”

DISCOUNTING: The inter-bank market that had discounted by Rs3.8bn on Thursday again resorted to Rs10.3bn discounting on Friday.