Increased banking spread can hit economy: State Bank warns
By Our Staff Reporter
KARACHI, April 19: The rise in banking spread is a source of concern for the policymakers since it is generally associated with deterioration in banking sector efficiency, says the SBP second quarterly report issued here on Wednesday.
The State Bank included a ‘special section’ in the report to explain the reasons behind the high banking spread which has been under harsh criticism by economic writers and depositors.
“The current rise in the banking spread is rather intriguing and calls for identifying the causative factors,” said the SBP report.
The report warns that the rising banking spread could affect economic growth and discourage investments and savings.
Analysing the situation, the report says that the gone are the days in Pakistan when the significant provisioning against non-performing loans and unfavourable tax structure in the banking system used to increase operating expenses and banks had to raise the spread to remain profitable. However, in the recent years both the asset quality and profitability of banks had improved significantly, said the report.
At the end of December 2005, 50.9 per cent of the total bank deposits were placed at the rate between zero and one per cent followed by 27.8 per cent deposits placed at between one and four per cent. On the other hand, 44.5 per cent of the total bank advances were placed at between nine and 12 per cent.
“This distribution of returns against deposits and advances is itself an indication of higher spread,” said the report.
The report also found reasons for higher spread and said the nature of banks’ lending and deposit taking activities had experienced a shift in terms of both outreach and diversification of banking services.
“The dynamics of banking spread has also changed and therefore the rising trend may not necessarily be depicting the operating inefficiencies in this sector.”
The SBP argued that the maturity profile of deposits was another reason for higher banking spread. It said the maturity profile of bank deposits had shifted towards shorter tenure. Despite 39.8 per cent growth in fixed deposits during 2005, the fixed deposits with the maturity within six months registered a growth of 96 per cent.
The report also said that banks’ lending profile had also changed as they were lending to risky sectors like SME and consumer financing which yielded higher profits, thus causing higher banking spread.
The SBP realised that the widening spread could hurt economic stability, but said: “It may be too early to warrant an immediate policy response.”
“It is expected that the completion of monetary transition and the passing through on lending and deposit rates will help banks in narrowing the spread somewhat,” the SBP added.
However, the report did not mention when the monetary transition would be completed.
