KARACHI, March 1: Two of a trade seldom agree. This does apply well on bankers—particularly when it comes to deciding if there is a need to lower lending rates.

“There is always a difference of opinion between the treasury and credit management people on how much rate cut is advisable,” admits a top executive of a state-run bank. Dawn had asked him why nationalised commercial banks had failed to employ suitably the surplus money they have been wallowing in for quite some time. “We did lower our lending rates but that was slightly out of touch with the market conditions. We should have made deeper cuts (in lending rates),” the executive admitted frankly. But he is not the only one to make such admission. Several other senior bankers—mostly from the treasury divisions of banks—lament the fact that their banks are sitting on huge surplus funds but are reluctant to make a really big cut in lending rates to employ these funds in the private sector.

But the executives heading credit divisions of banks say they opposed an across-the-board big cut in lending rates primarily for two reasons: (i) this would bring in more losses on the bank books rather than what is being anticipated in the event a bank is forced to over-invest in low-yield treasury bills and (ii) it might result in imprudent lending and that in turn might increase the non-performing loan portfolio.

The weighted average lending rate of nationalised banks fell to 10.41 per cent at end-January 2003 from 12.67 per cent in July last—a fall of 2.26 per cent. But privatized and private local and foreign banks made a much deeper cut in their lending rates.

According to the latest State Bank figures available on its website the weighted average lending rate of privatized banks came down to 10.48 per cent from 13.01 per cent showing a fall of 2.53 per cent. The average lending rate of local private banks declined by 2.41 percentage points to 10 per cent at end-January 2003 from 12.41 per cent in July 2002. And the weighted average lending rate of all the foreign banks combined went down to 8.38 per cent from 10.76 per cent during this period. Specialised banks made no significant cut in lending rates at all: Their weighted average slipped marginally to 14.02 per cent from 14.14 per cent.

All this slashing brought down the average lending rate of all the banks combined to 9.95 per cent at end-January 2003 from 12.17 per cent in July 2002—a big reduction of 2.22 percentage points within a span of only seven months.

But given the fact that the inter-bank market had been surplus in cash all this time and that there was not matching pickup in credit demand some banks do feel now that they should have made deeper cuts in the lending rates. “We never knew we would be in this situation,” said head of a large local bank—referring to a very excessive liquid inter-bank market that is sure to give some banks a big jolt on profitability.

“To tell you the truth one or two banks would be badly hit,” he says thoughtfully adding that whatever credit demand had been there in the first seven months of this fiscal year that has not absorbed most of the liquidity available in the market. “Partly we are also to be blamed as we did not make sufficient cuts in lending rates that might have increased credit disbursement,” he told Dawn.

From July 2002 up to February 8, 2003 all banks disbursed Rs75 billion credit to the private sector. The full fiscal year target is Rs94 billion. Senior bankers say the figure may not touch the target amount as the last quarter of the fiscal year (April/June 2003) will see very rapid credit retirement as the credit offtake season is normally over in March.

Throughout this fiscal year the State Bank sent many signals to the banks to desist from over-investing in treasury bills and find ways to enhance credit disbursement in the private sector instead. “But the banks picked up these signals half-heartedly to say the least,” lamented a senior central banker who declined to be named.