KARACHI, July 2: The lowering of the profit on national saving schemes by up to 1.5 per cent may push banks to cut their lending rates further in the first half of this fiscal year.

Senior bankers say the rate cut on NSS should help the banks revisit their lending rates as it would improve their ability to raise deposits.

It is difficult to estimate how much reduction the banks will make in their lending rates but given the fact that the NSS rate cut would make room for the banks to lower their deposit rates further; the lending rates seem set to fall further.

This becomes all the more likely also because the government has reduced the tax rate on banks income by three percentage points to 40 per cent in the budget for 2003-04.

But bankers say much would depend on whether the State Bank is going to ease its monetary policy further—or tighten under any consideration. Bankers say if the monetary policy is eased off further or even if it remains stable they would be able to lower their lending rates further. But if the policy is tightened, the chances for which can never be ruled out, then this may not be possible.

Senior bankers point out that further lowering of the lending rates would also depend on how much room is created for the banks to raise cheap deposits amidst soaring stocks. They admit that with the weighted average deposit rate having turned negative (below the inflation rate) and with the stock market set to rise further, the NSS rate cut would create very little room for raising still cheaper deposits. “But it would certainly create some room,” says head of credit division of large local bank.

The weighted average lending rate of all banks combined fell to 8.26 per cent at end-March 2003 from 12.17 per cent at end- July 2002 and the weighted average deposit rate fell to 2.81 per cent from 4.02 per cent—against inflation of 3.2 per cent.

In the last three months the Karachi Stock Exchange 100-share index rose by 25 per cent to 3402 points at end-June from 2715 at end-March 2003 and there are indications that the NSS rate cut would boost the market further.

Bankers also warn that the bank clients should not expect an across-the-board reduction in lending rates because banks are supposed to keep the credit quality above every thing when they revisit their lending rates. They also say that the extent to which the lending rates would fall also depends on the demand of private sector credit: If the private sector credit demand remains strong as it is now the rate-cut would not be too deep despite an anticipated huge inflow of excess liquidity. But if the demand for private sector credit remains stagnant—or decline then the banks will have to make deeper cuts in lending rates to employ their surplus liquidity.

Bankers say the lowering of the NSS rates would lead to cuts in bank lending rates but that would take some time as there is always a time lag after which they respond to change in monetary policy or NSS rate structure.