October 30, 2002	Wednesday	Sha’aban 23,1423

KARACHI, Oct 29: The gap between weighted average lending and deposit rates has widened from 4.8 per cent in June 1991 to 8.3 per cent at the end of June 2001.

The State Bank makes this startling revelation in its annual report for fiscal year 2001/02.

The report admits that this increase in the banking spread is often cited to conclude that the financial reforms pursued in the 1990s were a failure. But it says that this interpretation is not correct.

“The increase in banking spread should be interpreted with caution,” says the report. Because “in the pre-reform period, interest rates were controlled from both ends, with floors on deposit rates and ceilings on lending rates.”

The widening of the spread after the IMF/World Bank-backed reforms “partially indicated the change from a repressed to a liberalized interest rate regime,” says the report. “Moreover, it is important to note that the banking spread might not be a good indicator for gauging the efficiency of the banking system, as it does not cover all the interest earning and interest paying activities of banks.”

The report says the interest rate spread or the difference between the yield on earning assets and cost of interest liabilities may be used as a better alternative for gauging the efficiency of the banking system.

It reveals that this spread also rose from 4 per cent in 1991 to 4.9 per cent in 2001 but obviously this increase was much lower than the widening of the banking spread or the difference between lending and deposit rates.

The report says that the higher intermediation cost by the nationalized banks, given their size in the banking industry, is creating an upward bias in the cost structure of overall banking business in Pakistan. It is generally believed that the large operating cost for this group is mainly attributed to their huge infected portfolio, overstaffing and over branching and disproportionate tax burden.

The huge stocks of non-performing and defaulted loans coupled with problems of advance taxes and concessionary credit schemes are some key factors responsible for increasing the banking spread in the changed scenario.

A part of this increase in spread may be attributed to cost of reform process. Because disclosure of true classification of loan quality and provisioning requirement under strict supervision by SBP added to the operating cost of banks.

“However, this has contributed positively towards the soundness of banking system as earlier financial statements of banks depicting better than their actual health.”