KARACHI, July 5: Banks’ average lending rate rose to 7.97 per cent in May from 7.29 per cent in March this year, showing an increase of 68 basis points within two months. (Data for June 2005 will be out in the first week of August).
But their average deposit rate did not move as fast and inched up to 1.71 per cent in May from 1.43 per cent in March, registering a rise of 28bps only. As such, the gap between banks’ average lending and deposit rates widened to 6.26 percentage points in May, from 5.86 percentage points in March this year. An increase in the gap between average lending and deposit rates means banks are making bigger profits then before but are not sharing the same with their deposit holders judiciously.
Data released by the State Bank show that the weighted average lending rate on overall stock of loans of banks stood at 7.97 per cent in May 2005 up from 7.49 per cent in April and 7.29 per cent in March. On the other hand, the weighted average return on overall stock of banks’ deposits that stood at 1.43 per cent in March inched up to 1.55 per cent in April and to 1.71 per cent in May this year.
A 68bps increase in the average lending rate of banks in April and May reflect the aggressive tightening of interest rates by the central bank. The SBP that had followed a gradual hiking of interest rates to contain inflation in three quarters of the last fiscal year opted for aggressive tightening in April and May as inflation was still rising too fast. On April 11, the central bank increased its discount rate by one and half a percentage points to nine per cent and then reinforced this move by allowing sharp increases in the average yield on treasury bills.
As expected, average lending rates of all banks also started rising faster than in the past. In three quarters of the last fiscal year i.e. between July 2004 and March 2005 weighted average lending rate of the banks had showed an increase of 80bps—from 6.49 per cent at end-June 2004 to 7.29 per cent at end-March 2005. But in the next two months the average lending rate depicted a big rise of 68bps.
The pace of increase in the average deposit rate remained slower as compared to what was seen in lending rates. But even a 28bps rise in average deposit rate in April-May 2005 was much faster than in the past nine months of the last fiscal year. Between July 2004 and March 2005 average deposit rate had showed a marginal increase of 22bps.
In eleven months of the last fiscal year, weighted average lending rate of banks showed an increase of 148bps rising from 6.49 per cent at end-June 2004 to 7.97 per cent at end-May 2005. But the weighted average deposit rate, during this period, showed a modest rise of 50bps rising from 1.21 per cent at end-June 2004 to 1.71 per cent at end-May 2005. As a result the spread between lending and deposit rates that stood at 5.28 percentage points at end-June 2004 widened to 6.26 percentage points at end-May 2005. This big increase of 98bps in the gap between lending and deposit rates or banking spread as the bankers call it should be a cause of concern for the policy makers.
