KARACHI, July 13: Gross advances by the banks increased by 11 per cent in first half of the current calendar year, which was clearly a significant increase while comparing it with the 3 per cent and 4 per cent in the corresponding periods of the last two successive years.

This could be surprising for many that despite tight monitory policy of the State Bank and high interest rates, the banks continue to supply money on a much bigger scale.

How inflation cuts value of money is obvious from the higher borrowing by the corporate sector to meet their running expenses or working capital, bankers said.

The bankers said the corporate sector requirements increased because of loss of value of rupee in the wake of high inflation resulting in devaluation of rupee.

“Inflation has grabbed the entire economy. The tight monetary policy cannot work in isolation as the increased prices of input demand higher supply of money,” said a senior banker, who was against the State Bank’s policy of increasing discount rate.

The benchmark interest rate, discount rate, was increased to 12 per cent by the SBP, which has translated into 15 per cent to 24 per cent in lending rates of banks.

Analysts said the political unrest emerged as the stumbling block against the higher advances and the negative sentiment remained dominant in the first half of the fiscal year 2008 ended on June 30.

However, the second half (Jan-June) surprisingly witnessed increase in the pace of advances by the banks. Analysts identified at least three reasons for this higher growth, including higher inflation with cheaper money.

“Despite monetary tightening, which saw SBP increased discount rates by 200bps during first half of 2008, advances growth remained strong as banks already had committed corporate borrowings in the power and agriculture sectors,” said a researcher at JS Company. Moreover, the government borrowings from commercial banks to pay outstanding Price Differential Claims to OMCs (Oil Marketing Companies) also contributed to the robust growth in advances,” he said.

Another researcher said the higher inflation, which abruptly increased the input cost, forced the manufacturers to borrow more to meet their running expenses. The gross advances of scheduled banks reached Rs2.9 trillion ($43.1bn) as of June 28, 2008

Economists and analysts have been predicting inflation as high as 20 per cent this year, which means substantial loss of buying ability of rupee that will escalate input cost much higher again compelling them for more borrowing.

“This is a vicious circle of inflation and borrowing. It can only be controlled through higher economic growth, which will bring stability as the higher inflation is a sign of destabilisation and uncertainty in the economy,” said the researcher.