Lending-deposit rates gap widens: Dollar-denominated loans
By Mohiuddin Aazim
KARACHI, Sept 8: At end-June 2004, weighted average lending rate on the US dollar-denominated loans was 3.90 per cent, which shot up to 4.16 per cent at end-June 2005. But much to the chagrin of the depositors, weighted average return on the dollar deposits rather fell from 1.99 per cent to 0.83 per cent during this period.
The above data is part of the recently released statistics by the State Bank on interest rate structure.
With the average lending and borrowing rates at 3.90 per cent and 1.99 per cent, respectively, at end-June 2004, the spread between the two was 1.91 percentage points. This gap widened to 3.33 percentage points at end-June 2005, with the average lending and borrowing ratpc per cent, respectively.
Apparently this was to the disadvantage of the depositors. But there is more to it than meets the eye.
During the last fiscal year (July-June 2004-05), the dollar rose by 2.6 per cent against the rupee. So, the depositors of dollars got an average return of (0.83pc plus 2.6pc), or 3.43 per cent average return on their deposits in rupee terms, if one assumes that they kept their deposits for a full fiscal year. Since the dollar had risen by only half-a-percentage point against the rupee during the fiscal year 2003-04, the depositors of dollars received an average return of (1.99pc plus 0.5pc), or 2.49 per cent in rupee terms during that fiscal year.
Though the rate of return on dollar deposits rose considerably in the last fiscal year, the cost of borrowing dollars in terms of local currency also increased. The 4.16 per cent average lending rate of banks on dollar loans in the last fiscal year was equal to 6.76 per cent in rupee terms if the impact of 2.6 per cent rupee depreciation against the rupee is accounted for. This was far higher than what it used to be a year ago. The 3.90 per cent average lending rate on dollar loans during the fiscal year 2003-04 came to 4.40 per cent only because of half-a-percentage point rupee devaluation against the US unit.
Now, matching apples with apples one finds that as the rupee-based cost of the dollar-denominated borrowings was 6.76 per cent and the rupee-based return on dollar deposits was 3.43 per cent, the gap between the two rates was 3.33 percentage points during the last fiscal year. In the fiscal year 2003-04, however, the gap between the rupee-based cost of dollar-denominated borrowings and rupee-based return on dollar-denominated deposits was 1.91 percentage points (4.40pc minus 2.49pc).
As is evident from the above, whether one talks of the spread between the lending and deposits rates on dollar deposits in nominal terms or in rupee terms, both yield the same results.
And the results stated above show that the spread between the two rates widened very much during the last fiscal year. This gap means that whereas the banks earned more on dollar deposits during the last fiscal year as compared to a year ago, they shared a very small part of that with the depositors.
SAME TREND: The trend is in line with what was seen in the rupee-based lending and deposit rates. The gap between weighted average lending and deposit rates in rupee-based lending and deposit taking was at 5.28 percentage points at end-June 2004, with the average lending and deposit rate at 6.49 and 1.21 per cent, respectively. At end-June 2005, this gap expanded to 6.56 percentage points as the weighted average lending rate shot up to 8.41 per cent but the average deposit rate only inched up to 1.85 per cent.
