KARACHI, Oct 14: Pakistan's banks should avoid lending recklessly and betting the current low interest rate environment would remain unchanged for a long time, because such expectations can expose them to high credit risks , the State Bank governor said on Thursday.

"Reckless lending or optimistic forecasting that the current low interest environment will remain unchanged in time to come is bound to get your institutions into deep trouble," Dr Ishrat Husain said in a speech at the Institute of Bankers in Karachi.

The remarks are likely to spark debate among financial market players, who have been calling for faster interest rate increases to counter rising inflationary pressure.

The central bank has maintained that it will continue to raise interest rates in a "measured" fashion to slow rising prices, as outlined in its semi-annual policy statement issued in July.

In the first quarter of the current fiscal year, consumer prices rose an average 9.18 per cent on year, suggesting the government may not achieve its full-year inflation target of five per cent. In the last fiscal year, Pakistan's inflation rate was 4.57 per cent.

Mr Husain said Pakistan's first-generation reforms in banking and financing had liberalized its financial markets, improved the financial infrastructure, strengthened the regulatory environment and opened up lending services to the middle- and lower-income classes. He said the current second-generation reforms should focus on increasing credit access to the middle- and lower-income groups.

"We should continue to move along these lines and aim to reach out to at least three million households in the agriculture sector and two million small, medium and micro-enterprises in the next five years," he said.

But Mr Husain said lending to these groups should be prudent to keep credit risks in check, and flexible to meet the needs of smaller borrowers. In his speech, the SBP governor also talked about the mismatch between the rapidly growing appetite for mortgage and project financing, and the lack of institutions that offer them.

He said the central bank and the SECP were willing to help the banking industry in increasing private equity and venture capital funds, private pension and provident funds and real-estate investment trusts. -Dow Jones Newswires