KARACHI, Nov 28: The State Bank has asked the banks to see if they can set a benchmark of lending rates for their customers. And the central bank has sought a report on this subject from a sub-committee of Pakistan Banks Association headed by country manager of ABN Amro Naveed A. Khan.

Sources close to the committee say some committee members are of the view that instead of linking the customers lending rates to the SBP discount rate of treasury bills rate the banks should introduce their own prime lending rates. But opinions are still divided on it.

The committee members are: (i) National Bank (ii) Habib Bank (iii) Muslim Commercial Bank (iv) ABN Amro Bank (v) Citibank and (vi) Standard Chartered ANZ Grindlays Bank.

Senior bankers said the committee had started working on the assignment and it would finish the task within a couple of days. The committee met here on Tuesday at ABN Amro Bank and discussed how banks could benchmark their lending rates for the customers.

SBP Deputy Governor Tawfiq A. Husain had told top bankers last week how their inability to cut lending rates in response to the discount rate cuts by the SBP was making it difficult to revive the economy by easing the monetary policy.

The bankers had listed half a dozen reasons including a severe liquidity crisis that was blocking a cut in their lending rates. But Husain had asked them to find some benchmark for the lending rates to satisfy the borrowers that they were not being over- charged. (The borrowers get this feeling as the gap between the weighted average lending and deposit rate has risen to nine per cent with average lending rate at 14 per cent plus and deposit rate at just five per cent.)

Since the start of fiscal year 2001-02 in July the State Bank has so far cut its discount rate by four per cent to 10 per cent. At the same time the central bank has also reduced the cut-off yield on six-month treasury bills by more than four per cent to 8.30 per cent. But banks are yet to pass on the benefit of this rate-cut to their customers in the form of reduced lending rates.

The committee headed by Naveed A. Khan is trying to come up with a unanimous conclusion on how the lending rates of the banks could be benchmarked for the customers.

Senior bankers say the committee members are of the view that instead of using the SBP discount rate or treasury bills rate as a benchmark all banks should start quoting their prime lending rates. The committee members believe that uncertain government policies would make life miserable for banks if they benchmark their lending rates with the SBP discount rate or treasury bills rate. Besides, these rates are not (and cannot be) reflective of the banks cost of funds. They also believe that KIBOR or Karachi Inter-bank Offered Rate, being a benchmark of purely inter-bank dealings, cannot be used to benchmark the customers lending rate.

That is why the committee members are of the view that the banks should rather introduce prime lending rates. But here the problem is that whereas foreign banks with smaller non-performing loans portfolio and lower cost of operations would naturally have an advantage over state-run banks. The state-run banks with large non-performing loan portfolio and higher cost of operation would not be able to keep their prime lending rates closer to those set by foreign banks — and lose their clients.

The committee is thus in a dilemma. Chances are that when the time comes for sending its findings to the SBP the committee may try to gain time or side track the issue.

But sources close to the State Bank say the central bank would not let the banks do this. “We cannot dictate banks on lending rate but we want them to realize that they should respond timely to the changes in the monetary policy,” said a central banker, who declined to be named.

The SBP is persuading the banks to cut lending rates not only because it has become overdue but also because the gap between lending and deposit rates has risen to more than nine per cent. That brings into question the banking sector reforms undertaken in the past three years. The savers and the borrowers are not ready to listen to any argument forwarded by the banks or even by the State Bank to justify this huge gap between the lending and the deposit rates.