KARACHI, Oct 8: Weighted average lending rates of all banks rose by over 34 per cent in the first eight months of the calendar year 2005, reflecting a very high interest rate trend as a result of tight monetary policy.

However, despite higher lending rates, which make money costlier for the borrowers, the banks have succeeded in increasing growth in their advances.

State Bank’s data on the subject shows that all banks’ weighted average lending rates jumped to nine per cent in August from 6.68 per cent in January 2005. Contrary to lending rates, weighted average deposit rates of all banks, which show a return to the depositors, rose to 3.94 per cent from 1.75 per cent.

This is an increase of 125 per cent in the deposit rates, but analysts believe that the gap between lending and return to depositors is still wide.

The weighted average lending rate of public sector banks in August 2005 was the highest — 10.11 per cent. The private sector banks’ rate was 9.30 per cent, foreign banks 7.38 per cent and specialized banks 9.18 per cent.

In January, the weighted average lending rates were significantly lower. The rate of public sector banks was 8.4 per cent, private banks 6.91 per cent, foreign banks 5.42 per cent and specialized banks 9.07 per cent.

The weighted average deposit rates were much lower in January, compared to August. The rate in August for all banks was 3.94 per cent, while the same was 3.07 per cent for public sector banks, 3.91 per cent for private banks, 4.31 per cent for foreign banks and 7.72 per cent for specialized banks.

The deposit rate in January for all banks was 1.75 per cent, while the same for public sector banks was 1.45 per cent, for private banks 1.46 per cent, for foreign banks 3.04 per cent and 2.73 per cent for specialized banks.

In the wake of high inflation rates, the analysts believe, the lending rates will further increase in the last quarter of the calendar year. They said borrowing by the private sector would be at peak in the third quarter because of higher-than-expected arrivals of cotton into factories and borrowing by the textile sector.

The government has set the inflation target at eight per cent for the current fiscal year, but donor agencies like the ADB and the World Bank believe that it would be not less than 8.5 per cent. The analysts point out that the rising oil prices may push inflation further higher even if the prices remain at $60 per barrel.

“If inflation remains above eight per cent, the lending rates would certainly be on the higher side,” said an official of National Bank.

Contrary to the higher lending rates, the deposits have been a cause of concern for both depositors and the central bank. The State Bank has recently issued a circular to all banks, expressing its dismay at low returns to the depositors.

The banking sector got a boost in the year ending June 2005 and emerged as the highest earning sector in the country. The analysts believe that banks’ earning would continue to grow despite higher lending rates mainly because of very high consumption by the private sector. The private sector played a key role in achieving 8.4pc GDP growth last year and is still chasing a relatively lower GDP growth of seven per cent for 2005-06. The higher GDP growth would require more money, which means more profits for banks.