KARACHI, Feb 19: The State Bank on Wednesday sent yet another signal to banks that they will have to find new borrowers and accommodate the existing ones quite liberally if they want to keep their profits from falling.

The central bank lowered the cut-off yields on three-month and one-year bills by 22 basis points and nine basis points to sell Rs10.10 billion worth of the two bills. “Though the rate-cut is small it reinforces the earlier SBP signals that the government security paper is not a viable alternative investment for banks,” said treasurer of a foreign bank.

The State Bank had lowered its discount rate by 1.5 percentage point to 7.5 per cent in mid-November in a somewhat bleated move to facilitate banks to increase their private sector lending. The rate-cut was followed by gradual lowering of the yield on T-bills of all maturities. But the banks are yet to make any substantial cut in their own lending rates though they have revised the rates downwards on case by case basis.

Despite that the private sector credit has picked up and upto January 25 the banks had disbursed Rs74 billion loans against the full fiscal year target of Rs94.7 billion. Senior bankers say the private sector credit may not grow substantially in the coming months as full scale retirement would start from April. In fact credit retirement on a limited scale has already begun and as such chances are that credit expansion target of Rs94 billion slip by.

“The significance of the modest rate-cut on Wednesday is that the SBP has once again indicated to banks that T-bills rate may continue to fall,” says treasurer of a local bank. “In that event profits of banks would decline if they continue to invest surplus money in the bills and do not bother to find new borrowers or accommodate the existing ones.”

The weighted average lending rate of all banks is still above 10 per cent which in the eyes of senior central bankers is too high and needs to be cut down. “Banks are not willing to give housing loans at say 8 per cent. They are also not willing to lend to new borrowers at this rate but are putting in all they can in the government papers,” lamented a central banker who declined to be named. “The gradual fall in the T-bills yield should serve as an eye-opener for the banks and they should step up efforts to make cheaper finances available.”

Whereas bankers say they will take time in venturing into new areas of lending like housing and small and medium enterprises as well as consumer financing what they can is to increase farm credit and corporate financing.

“In corporate financing banks need to be much more flexible,” says head of credit division of a bank admitting that most banks lack a strong will and necessary expertise to reschedule old loans. “We need to accommodate those who had been in default in a way to enable them to earn more and not only repay the old loans but also get new credit lines.”