0
KARACHI, Sept 27: Interest rate spread fell 60 basis points in a year from 5.2 per cent at the end of 2001 to 4.6 per cent at the end of 2002 indicating that the health of the banking sector has improved. Interest rate spread is the difference between the cost of interest liabilities and yield on earning assets of banks.
“When the interest rate spread falls it shows that the banking sector has become more efficient,” explained a senior official of the State Bank. He said the interest rate spread fell in 2002 as the banks not only lowered the cost of liabilities but they also earned less on their assets: the banks managed to cut down their cost of liabilities from 6 per cent in 2001 to 4.2 per cent in 2002 and the yield on their earning assets also went down from 11.2 per cent to 8.8 per cent.
Thus the banks cut their cost of liabilities by 1.8 percentage points and the yield on their earning assets fell 2.4 percentage points. “The fact that the yield on earning assets of banks fell by a bigger percentage means the banks did not make very big cuts in deposit rates,” explained another central banker. “On the other hand it also shows that the banks made advances cheaper— and earned lesser profit on investment.”
That the banks got lesser profits on investment in government securities last year is an open secret. And that the bank loans became cheaper is also common knowledge. But it is difficult to assess which of the two had a greater impact on overall fall in yield on banks earning assets. One can make a rough estimate if takes into account the fact that the weighted average yield on benchmark six-month treasury bills fell 3.6 percentage points in the year ending on 31st December 2002 coming down to 4.32 per cent from 7.92 per cent at the end of 2001. This fall in six-months TBs yield serves as a key indicator because these are used frequently by banks for investment.
Similarly, the decline in the weighted average lending rates of banks was also quite big—it fell over three percentage points to 10.3 per cent by the end of the last year.
Whereas lower markup on lending and lower return on investment reduced banks yield on their earning assets and the slashing, made in deposit rates, brought down their cost of interest liabilities. In 2002 the weighted average deposit rate of all the banks combined fell more than
Interest rate spread falls one percentage point to 3.60 per cent by end-December.
OUTLOOK FOR 2003: Central bankers say whereas a 60 bps fall in interest rate spread in 2002 is certainly an indicator of good health of the banking sector but there is still room for further reduction in this spread.
Senior bankers say that most banks have continued making cuts in their cost of interest liabilities in 2003 i.e. they have kept lowering the rates of return on bank deposits. But they say what has emboldened banks to do this is that they have also continued slashing lending rates.
“So the cost of interest liabilities is going to shrink more and their yield on earning assets will also squeeze,” said head of a foreign bank. The banker said it was not only the downward repricing of loans that was bound to lower the yield on earning assets this year but also the continued decline in the rates of return on government securities — primary the treasury bills.
In nine months to September 2003 the weighted average yield on six-month bills has fallen 2.24 percentage points coming down to 1.60 per cent. He said a decline in non-performing loan portfolio as a whole and the fact that fewer fresh loans now get stuck up should lower the NPLs drag further this year. At end-June this year total NPLs of all commercial banks fell to Rs162 billion from Rs168 billion a year ago. Banks also made cash recoveries of R7 billion in this period.
Bankers admit that taking advantage of excess liquidity with not many avenues open for the saving public banks have already reduced their deposit rate by a big margin. In six months to June this year the weighted average rate of return on banks deposits has fallen by 1.70 percentage points to a humiliating low of 1.90 per cent. Senior bankers say though the rate now looks stable yet the room created through a 1.70 percent cut in it would help banks narrow the interest rate spread this year.
