KARACHI, Jan 7: Corporates will soon find it difficult to get huge overdrafts or running finances from banks. The State Bank would soon make moves that would eventually phase out the culture of ODs and RFs. Banks will rather insist upon their customers to borrow money for defined tenures-and on market-driven floating rates.

SBP Deputy Governor Mr Tawfiq A. Husain dropped a clear hint about it at a meeting with a sub-committee of Pakistan Banks Association here on Wednesday. Sources privy to this meeting said the central bank would call a meeting of heads of all banks later this month to finalize the improved version of KIBOR or Karachi inter-bank offered rates. They quoted Mr. Husain as saying that SBP would then issue some guidelines to encourage corporates to accept KIBOR as a reference rate for bank borrowings. They said the guidelines may be introduced before the end of this month.

The sub-committee headed by ABN Amro Country Manager Mr Naved A. Khan discussed with Mr Husain and his colleagues how banks could make KIBOR useful as a reference rate for corporate lendings. Other senior bankers at the meeting were Habib Bank President Mr Zakir Mahmood; chief executive of Standard Chartered Bank in Pakistan Mr Badar Kazmi and treasurers of some leading local and foreign banks. Head of SBP Treasury Mr Zafar Shaikh was also present. The meeting recognized the need to have a reference rate without which interest rates could not be made truly responsive to the monetary policy.

The bankers informed Mr Husain that corporates have so far not accepted KIBOR as a reference rate because it is worked out by banks-and is yet to be owned as a reference rate by the SBP. Mr Husain said the SBP and the PBA would work jointly to ensure that it is owned as a credible reference rate adding that SBP would also issue a public statement to this effect. Senior bankers say though SBP cannot force banks or corporates to use KIBOR as reference rate it can encourage both to do this by issuing some guidelines. KIBOR was introduced in September 2001.

Bankers say once they start using KIBOR as a benchmark to price corporate loans that will gradually eliminate the culture of overdrafts and running finances. "ODs and RFs are not taken for clearly defined tenures. Those getting these facilities can retire them any time," explains a senior banker. "In case of linking ODs and RFs with KIBOR the corporates will start repaying these loans taking advantage of daily fluctuations in KIBOR. That will force banks to ask corporates to borrow money for clearly defined tenures." That will help both banks as well as corporates to manage their cashflows more efficiently.

Central bankers say there is a need to link corporate loans to KIBOR because banks do not make desired changes in lending rates in response to the changing monetary policy. At times they also form cartels to avoid slashing lending rates by big margins. To tackle this issue, SBP first tried to convince banks to quote prime lending rates for their first class borrowers. But large local banks resisted the move. These banks having large branch networks and plagued with huge bad loans found it difficult to compete with foreign banks that have few branches and carry little bad loans.