KARACHI, Aug 4: Despite a slow off-take of credits, banking spread was still highest in the region though it lost some weight during the last six months.

Latest State Bank data showed that the six-month (Jan-June-08) average banking spread declined by 31 basis points to reach 7.08 per cent. The six-month average banking spread of last year was 7.39 per cent.

The data reveals that the average lending rate of banks increased during six months but the average deposit rate rose sharply mainly due to higher fresh offering of bank.

According to the data, the average lending rate of banks went up by 14 basis points to 11.43 per cent while deposit rate increased by 45 basis points to 4.35 per cent. It was 3.9 per cent in six months of 2007.

Analysts said that the banks have been offering more than 16 per cent on fresh deposits which naturally cuts their profits and reduces the banking spread.

“Under the prevailing high inflation, banks are bound to offer higher returns on deposits, otherwise, depositors may chose to park their liquidity other than banks,” said an analyst.

The inflation put real pressure during the last three months and the result was more reflective in June when banking spread fell sharply by 57 basis points.

The spread in June slipped to 6.78 per cent, lowest during this calendar year. Bankers said the cost of banking has gone high due to higher inflation which compels banks to offer higher return on their money.

“Depositors living under the rampant inflationary pressure of over 21 per cent cannot be convinced to place their money in banks at 10 or 12 per cent,” said a senior banker, adding that a commercial bank has been offering as high as 22 per cent for longer period of deposits.

Analysts said the economic performance indicates a slow growth which means the lower credit-off take which may cut banks’ profits.

They said the banks would see more pressure in the coming months with the slowdown of economy and higher inflation.

“There is no hope that inflation will come down and the response of various sectors of the economy is poor. It will simply add pressure on banks to offer more and bear maximum cost of doing business at least during the next six months,” said the banker.

“Spreads are likely to remain under further pressure though high Kibor (Karachi Inter-Bank Offered Rate) may lend some support to lending rates,” said a researcher at JS Company.

“We expect spreads to float in the range of 6.6 to 6.8 per cent during the second half of 2008, with an average spread for 2008, ranging between 6.8 and 6.9 per cent,” he said.