04 September 2004	Saturday	18 Rajab 1425

KARACHI, Sept 3: Average lending rate of banks fell further in July this year despite the fact that the central bank initiated a gradual tightening of the monetary policy at the same time.

The weighted average lending rate of all banks combined went down to 4.63 per cent on fresh loan disbursements at end-July, down from 5.04 per cent at end-January 2004.

Data released by the State Bank reveal that the weighted average lending rate applicable on total outstanding loans at end-July also fell to 6.43 per cent from 6.91 per cent at end-January 2004.

Senior bankers say what enabled them to lower average lending rates in July, despite having received clear signals from the State Bank that it was going to raise interest rates gradually, was that they had enough money to lend.

In July, total deposits of the banking system surged by Rs58 billion to cross the Rs2 trillion mark. They also say that though SBP started raising the treasury bills yields much earlier, it was not until the third week of July when the central bank said it was ready to enhance the rates to contain inflation in July-December 2004.

"Average lending rates may show a spike from August onwards," said head of a large local bank when asked by Dawn when the banks' lending rates would respond to the upward adjustments in treasury bills yields.

Pakistan achieved an estimated 6.4 per cent economic growth in the last fiscal year on the back of historically low lending rates that enabled large scale manufacturing sector to grow by 18.1 per cent. A year earlier, the country had seen 5.1 per cent economic growth with the LSM growth at 7.7 per cent.

But a higher economic growth pushed up inflation to 4.6 per cent in the last fiscal year from 3.1 per cent a year earlier. And this year too, chances are that consumer inflation would rise beyond the targeted level of 5 per cent. In July, the first month of the fiscal year, inflation shot up by 9.3 per cent year-on-year.

This has prompted the State Bank to raise interest rates but in July-August it raised the rates a bit slower than what the market was expecting. However, in the latest auction of treasury bills held on September 1, the SBP raised the yields sharply signalling to the market that it was ready to contain inflation through "appropriate tightening" of monetary policy.

DEPOSIT RATE: Weighted average rate on fresh deposits of all the banks combined inched up to 1.20 per cent at end-July from 1.12 per cent at end-January 2004. These figures have been arrived at by including the deposits carrying zero returns. But these are appropriate to be matched with weighted average lending rates mentioned earlier, because those have also been arrived at by including written-off loans that carry no zero mark-up.

Obviously, a 1.20 per cent is humiliatingly low, and is far below inflation of 9.3 per cent in July. But bankers say weighted average deposit rate of banks can never match inflation at a time when even the average lending rate is far below inflation.

"What is important to note is that banks did manage to raise deposit rates, though modestly, even while lowering their lending rates," said head of a large local bank pointing to the fact that the gap between average lending and deposit rate fell to 343 basis points in July from 392bps in January 2004.