May 4, 2002	Saturday	Safar 20, 1423

KARACHI, May 3: The 1.77 per cent cut in average lending rates of all the banks combined during July/March 2001/02 has not come about without any reduction in average deposit rates.

The State Bank statistics show that during this period all the banks put together lowered the weighted average deposit rate by 45 basis points. At end-June 2001 the average deposit rate was 5 per cent. At end-March 2002 it slipped to 4.55 per cent.

During this period the combined weighted average lending rate of all the banks came down from 13.74 per cent to 11.97 per cent— showing a fall of 1.77 per cent. Thus the difference between the average lending and deposit rate fell from 8.74 per cent at end- June 2001 to 7.42 per cent at end-March 2002—recording a decline of 1.32 per cent in nine months.

The statistics show that foreign banks made the biggest cut of 1.58 per cent in their average deposit rate that fell from 5.79 per cent at end-June 2001 to 4.21 per cent at end-March 2002. But since the foreign banks also made the deepest cut of 2.94 per cent in their average lending rate during this time the gap between their average lending and deposit rate contracted significantly. At end-June 2001 the gap stood at 7.36 per cent and at end-March 2002 it fell to only 6 per cent.

Three state-run banks namely (i) National Bank (ii) Habib Bank and (iii) United Bank together cut their average deposit rate by 30 basis points during July/March 2001/02: the rate declined from 4.39 per cent at end-June 2001 to 4.09 per cent at end-March 2002.

But since they had cut the average lending rate by only 98 basis points during this time the spread between their average lending rate and deposit rate saw a contraction of only 68 basis points: the spread came down from 9.52 per cent at end-June to 8.84 per cent at end-March 2002.

Partly-privatized banks i.e. Muslim Commercial Bank and Allied Bank Ltd. together made a nominal reduction of 24 basis points in their weighted average deposit rate during the first nine months of this fiscal year: the rate fell from 4.07 per cent at end-June 2001 to 3.83 per cent at end-March 2002. And since they had cut the weighted average lending rate by only 82 basis points in this period the spread between their average lending and deposit rate contracted by only 57 basis points: the spread stood at 10.47 per cent at end-June 2001 and it came down to 9.90 per cent at end- March 2002.

The statistics show that local private banks cut their average deposit rates by 39 basis points during the first nine months ofthis fiscal year: the rate declined from 6.46 per cent at end-June 2001 to 6.07 per cent at end-March 2002. As these banks lowered their average lending rate by 1.71 per cent during this time the gap between their average lending and deposit rate narrowed by a big 1.32 per cent: the gap stood at 7.51 per cent at end-June 2001 and it declined to 6.19 per cent at end-March 2002.

The above-quoted figures negate the popular belief that state- run banks are the worst performers as the difference between their average lending and deposit rates is much higher than other banks. The figures show that it is the partly privatized banks instead that have failed to match their spread between average lending and deposit rates even with the state-run banks—what to talk of foreign banks and local private banks.

Bankers say they were forced to cut deposit rates to make room for reduction in the lending rates. Many of them take pride in the fact that they managed to make much deeper cuts in lending rates than in the deposit rates. But people at large view deposit rate-cuts with concern because the reduced rate can hardly offset the impact of inflation—what to talk about adding more value to their savings. Inflation as measured by consumer price index stood at 3.04 per cent during first nine months of this fiscal year and is set to close above 4 per cent at the year-end in June.

The weighted average deposit rate of 4.55 per cent at end-March is less likely to rise by end-June. So at this level the deposit rate can hardly match inflation—more so because the net deposit rate would be a bit lower after the deduction of withholding tax.

Senior bankers including heads of major local banks say what makes the average deposit rate looks leaner is that the central bank also gives weightage to the current deposits while working it out. They say if the current deposits are given zero weightage than the weighted average lending rate would turn out to be much higher than what it is today. But then none of these banks make their own workings on weighted average lending and deposit rates public.