KARACHI, Aug 17: The State Bank is trying to devise a new and more reliable tool that can be used to push banks to increase the private sector lending at cheaper rates. Senior central bankers believe that an upgraded version of KIBOR (Karachi Inter-bank Offered Rate) can help them out.

But treasurers of top local and foreign banks say KIBOR itself cannot be used for this purpose. They believe that it can rather be used as a floor for the much-needed prime lending rate in the country.

“We have told the central bank that prime lending rate is the only solution,” said treasurer of a leading bank after attending a meeting on this subject held at the SBP head office on Friday. The central bank had invited treasurers of half a dozen leading local and foreign banks at the meeting.

The meeting chaired by an executive director and attended by some senior officials discussed at length how the banks could be pushed to lend more money to the private sector — and at cheaper rates. The SBP officials were of the view that KIBOR could be upgraded in a manner “that it becomes sort of benchmark for the private sector lending as well.”

Currently KIBOR serves as a benchmark only for the inter-bank lending.

Sources close to the meeting said SBP officials were concerned about the rising trend of over-investment of surplus funds into treasury bills. (In the last fiscal year banks invested Rs160 billion in T-bills and other federal government securities — and they lent only Rs30 billion to the private sector against the target of Rs98 billion). The sources said the officials told the select gathering of bankers that the central bank wanted them to lend more to the private sector rather then keeping the bulk of liquidity locked in treasury bills.

The sources said some bankers pointed out that the demand for private sector credit had fallen but they too admitted that there was still room for increasing private sector credit.

What has perturbed the central bankers most is that the easing of monetary policy in the last fiscal year had no big impact on the lending rates structure. (In response to five per cent cut in SBP discount rate — from 14 to 9 per cent — all the banks combined lowered their weighted average rate by only 1.71 per cent. The net reduction was still lower — only 0.88 per cent because the banks also cut their combined weighted average deposit rate by 0.83 per cent).

Obviously this nominal reduction in the banks lending rate is not acceptable to the State Bank that shares the government perception that the economy cannot be enlivened without the rate coming down to a single digit. (At end-June the weighted average lending rate of all the banks combined stood at 12.03 per cent).

It is against this backdrop that the SBP officials are keen on devising a tool that can supplement the push of the monetary policy for the banks to make adjustments in their lending rates.

Sources close to the meeting said some bankers told the SBP officials that the SBP should set up an overnight repo desk to suck in excess liquidity of banks on daily basis and keep the inter-bank interest rates stable.

They told SBP officials that the stability of inter-bank rates was a must to let KIBOR play a more important role in shaping up the lending rate structure and to set the stage for the launch of prime lending rates in Pakistan.

Bankers say the absence of prime lending rate or an informally agreed rate at which most banks can lend to top quality borrowers often fails the monetary policy.

“If the Reserve Bank of India makes a change in its monetary policy the prime lending rate is adjusted accordingly within no time,” says treasurer of a big foreign bank. “We need the same thing.”