KARACHI, Oct 23: Banks' lending rates have started rising in response to a gradual tightening of interest rates by the State Bank.
Weighted average lending rate on credit disbursement in August rose to 5.08 per cent from 4.63 per cent in July, according to the data released by the central bank. The average rate increased as most banks raised their lending rates in response to a measured tightening of the monetary policy by the SBP.
This 45 basis points increase in the banks' lending rate on fresh credit also pushed up the average lending rate on overall stock of loans to 6.48 per cent in August from 6.43 per cent in July 2004.
The data show that the weighted average lending rate of public sector banks rose to 6.05 per cent in August from 5.90 per cent and that of private banks increased to 5.4 per cent from 4.82 per cent. Similarly, the average lending rate of foreign banks inched up to 3.44 per cent for fresh credit disbursement in August from 3.33 per cent in July and that of specialized banks rose to 13.52 per cent from 12.50 per cent.
But this increase in average lending rates on fresh loans made in August did not reflect evenly in average lending rate of overall stock of loans of each group of banks. The average lending rate of public sector banks on their overall loan stocks rather fell slightly to 6.52 per cent in August from 6.58 per cent.
The reason is that the slight increase the public sector banks made here and there on advances made in August represented a very small portion of their overall loans portfolio. And the most prominent of them i.e. National Bank did continue lending at still low rates also in August to a large number of borrowers. The list of public sector banks includes National Bank, First Women Bank, The Bank of Khyber and The Bank of Punjab.
The same applies on private sector banks whose combined weighted average lending rate on overall stock of loans in August slipped marginally to 5.73 per cent from 5.75 per cent in July.
The list of private banks includes more than a dozen small banks besides four large local commercial banks that have been privatized i.e. Allied Bank, Habib Bank, Muslim Commercial Bank and United Bank.
Unlike in the case of public sector banks and local private banks, a higher weighted average lending rate on fresh credit offered by foreign banks in August also pushed up their average lending rate on the overall loans stocks. The average lending rate on overall loans portfolio of foreign banks shot up to 6.76 per cent in August from 5.97 per cent.
SBP had started increasing interest rates slowly since the middle of February this year. But it accelerated the process with the beginning of the new fiscal year in July. It raised the weighted average yields on three-month, six-month and one-year treasury bills by 32bps, 45bps and 50 bps respectively in July to check rising inflation. This set the stage for the banks to raise their own lending rates on fresh credit disbursement in August.
But the extent to which they increased their lending rates depended on credit demand from the government and the private sector, the credit worthiness of the borrowers and their own liquidity levels.
In the first two months of this fiscal year (July-August 2004), banks witnessed a higher appetite for credit in the government sector than in the private sector. So, the increase in lending rates in these two months was rather modest. Though the average lending rate of all the banks combined rose from 4.63 per cent in July to 5.08 per cent in August, it was closer to the average rate of 5.05 per cent in June 2004. Had the private sector shown as strong credit appetite in July-August as the government did, the average lending rate would have risen much faster.
In July-August, banks lent Rs52 billion to the government sector whereas their total lending to the private sector was Rs21 billion.
As the private sector credit picked up pace afterwards and rose to Rs64.5 billion as on October 2, 2004 on the back of cotton financing, banks' average lending rate for September 2004 should be substantially higher than in August if overall credit demand remains high.
Banks' average lending rates for September would be higher than in August and it would show a progressive increase afterwards, as SBP went on increasing treasury bills yields during and after August and it continues to do so.
Change in T-bills yields reflects in banks' lending rates after some time and the time lag depends on overall market conditions including credit demand and banks' liquidity. In August-September, SBP let the weighted average yields on three-month, six-month and one-year T-bills rise by 93bps, 48bps and 28bps respectively.
As for credit off-take, whereas the appetite for the private sector credit increased in September, the government demand for bank credit remained quite low. Net government sector borrowing for budgetary support that had shot up to Rs52 billion in July-August 2004 sank to Rs2.4 billion as on October 2, 2004.
So, banks would not see the overall credit demand rising too fast from September onwards unless the private sector's demand remains very strong. Chances are that, it will.
Big corporates are borrowing excessively these days not only to meet their instant needs but also in anticipation that the current low interest rates environment would soon be over and the SBP would have to accelerate the tightening of interest rates to contain inflation.
