KARACHI, Oct 6: After a cumulative 3.5 per cent cut in the policy interest rate since August 2011, both lending and deposit rates have dropped, but failed to attract the private sector for borrowing, says a latest report of the State Bank.

Details shows that policy interest rate was slashed by 350 basis points since August while the weighted average lending rate (WALR) fell by 211bps, making money cheaper for borrowers.

The SBP reported that weighted average deposit rate (WADR) also fell by 49 basis points; the rate was much smaller than the lending rate. Both rates were calculated on fresh loans.

The lending rate substantially declined in the wake of policy rate cut, but banks could not encourage private sector to borrow cheaper money.

Bankers said several important reasons were there which hindered private sector return to banks.

The most important factor was double digit inflation which never allows a borrower to remain safe in a volatile economy with poor growth trend.

They said banks were also reluctant to advance money for the private sector which has been increasingly adding non-performing loans (NPLs), which means risks were still high.

Despite a sharp decline in borrowing from private sector during the last four years, NPLs of the banking sector have been rising and now these have crossed the figure of Rs620 billion.

The State Bank in its monetary policy on Friday expressed concern over absence of the private sector from bank borrowing.

It said year-on-year growth in loans to private sector businesses declined from 22.4 per cent in FY08 to 0.7 per cent by the end of FY12.

The SBP report shows that the private sector has almost left banks while banks keep on relying on government papers for their incomes.

The SBP said scheduled banks are finding it easy to avoid private sector by lending to government without any risk.

The State Bank advised scheduled banks to step up efforts to go back to their basic intermediary role and channel loanable funds to the private sector.

Both the State Bank as well as other bankers said the government was also responsible for this situation as it appeared as sole borrower of the banking money, offering risk-free returns.

The lending rate on outstanding loans fell only by 83 basis points while deposit rate dropped by just 19 basis points during the said period.

The slash of interest rate by 350 basis points also affected the banking spread which fell below 7 per cent after a long spell of high banking spread.

According to SBP, the banking spread was 7.59 per cent in August 2011 which fell to 6.95 per cent, a drop of 64 basis points.

High banking spread reflects higher profit earnings by banks and lower returns to depositors.