KARACHI, Sept 19: Banks’ advances growth in eight months (Jan-Aug) 2008 declined to nine per cent against an average growth rate of 23 per cent in the last five years.

The impact of higher interest rate has started reflecting in the slow credit growth and there may be an expected fall in the corporate earnings.

Bankers said the advance growth should be higher than previous average growth of 23 per cent because the higher inflation slashed the purchasing power of rupee and increased the input cost.

Bankers expect that the cotton and textile sector borrowing would increase in the next few weeks as it was high time for working capital requirement of the sector and it may improve overall growth in advances of the banks.

However, the net interest income of banks has increased due to higher lending rates.

Banks have been investing in government treasury bills but in the wake of 25 per cent inflation, the real rate of return on t-bills is negative.

Banks are lending at much higher than 13 per cent while the banks were renting their rupee at 25 to 28 per cent to consumer financing which increases their NII.

“Higher interest rates have started affecting lending, as evident from the recent slowdown. Higher interest rates are likely to cause a further dent to the credit appetite of the industry.

“We expect advances growth to further slowdown and average around seven per cent in 2008,” said an analyst at JS Research.

Representatives of industrial bodies have been asking the State Bank to reduce the interest rate. The higher interest rate has increased the cost of production which would ultimately further increase inflation.

Brokerage houses also hold the higher interest rate responsible for the fall of the shares market. Though the fall of stocks is a global phenomenon, brokers said the banks have stopped investing in the equity market and higher lending rates have increased the risk manifold for borrowers, which weakened the market further.

Analysts said despite tight monetary policy of the State Bank, the inflation was rising, and to curb the inflation, the SBP increases interest rates, but it proved a failure many times.

Credit disbursement data showed that advances to agriculture and oil and gas exploration have increased and these were the only two sectors which easily surpassed the hurdle of higher interest rate.

Analysts expect that the growth would be led by the heavy-weight exploration sector that is likely to post an earning growth of 33pc in next years, mainly because of higher oil prices and weakening rupee.