KARACHI, Nov 18: One thing is certain. Banks cannot afford to keep their lending rates intact after a 1.5 per cent cut in the State Bank discount rate. They will have to lower their rates not only to show that they are responding to the SBP signal—but just to survive. But how?

“I think we will have to come up with a combination of three things to survive,” says president of state-run National Bank S. Ali Raza. “This time around banks will have to cut their lending rates to offset the negative impact of the discount rate-cut by increasing business.”

“Secondly the banks may also have to lower their deposit rates and thirdly more importantly they will have to come up with new products,” Raza says.

When asked by Dawn when exactly his bank might cut its lending rates—and to what extent he said: “We are hoping to see a 1-1.5 per cent cut in the lending rates within two to three months.” He said he had discussed this thing with his colleagues on Monday and would make more discussions on Friday with regional heads of the bank.

Raza says the reason why the banks need a combination of three things to survive is that the 1.5 per cent cut in discount rate is going to be followed by a cut in the yield on treasury bills and long-term bonds. This would obviously eat into the profits of the banks that had built up huge inventories of government securities in the absence of enough credit demand from the private sector.

President of state-run Habib Bank Zakir Mahmood says the same thing. “Not only in case of Habib Bank but generally speaking there will be a definite impact of the discount rate-cut on banks profitability,” says Mahmood. But he promises an upto 2 per cent cut in the lending rates for the middle and small class borrowers next month.

“Our medium and small class borrowers may see a cut in lending rate by up to 2 per cent,” he says but makes it clear that “it will be done on case to case basis...keeping in view the risk profile of the customers.” He claims that his bank has already made a cut in the top-end lending rates (in response to easing of monetary policy in the last fiscal year) adding that now the bank wants to benefit the medium and small borrowers. Sources in HBL that the bank will discuss the issue threadbare at the meeting of assets and liabilities committee on Wednesday.

Officials of several other local and foreign banks also said that they were willing to lower their lending rates but that would be made on case to case basis. Most of them also said that in order to create room for lending rate cut they would have to slash their deposit rates as well. These bankers said that the SBP permission to banks to enter into consumer financing would help them diversify their asset base thus enabling them to lower the lending rates. In the last fiscal year the SBP had cut its discount rate by five percentage points to 9 per cent but all the banks combined had reduced their weighted average lending rate by less than one per cent. That had shocked the private sector particularly the exporters who found it difficult to compete in the world markets with little reduction in their financial cost of input and rising cost of electricity.

The 1.5 per cent cut in the SBP discount rate on November 16 is the first one in the current fiscal year and heads of banks say that they may respond to the signal quicker than in the past. Not because they have become good guys but because if they do not cut their lending rates to increase business volumes they will simply lose. The once-much-attractive treasury bills and long-term bonds are all set to offer lower yields than before.

LOW YIELD: Senior bankers said the 10-year Pakistan Investment Bonds that were offering 8.95 per cent return (against the fixed coupon rate of 11 per cent) until Saturday traded in the secondary market at 7.65 per cent on Monday. The five-year bonds that were selling at 7.40 per cent on the weekend fetched only 6.80 per cent on Monday.