THE weighted average banking spread stood at an 11-year low during October at 5.33pc, down five basis points from September, show data recently released by the central bank.

Lending rates declined by 22bps to 8.96pc on the back of re-pricing of loan portfolios, while deposit rates slipped by 17bps to 3.8pc due to a 50bps cut in the policy rate in September.

That said, fresh spreads (i.e. the difference between fresh borrowing and lending rates) witnessed an improvement of 34bps month-on-month (MoM) to 3.22pc in October. Within this, fresh lending rates slipped 20bps to 7.57pc while fresh deposit costs dipped to 4.35pc, down 55bps.

Cumulatively, during the first 10 months of the calendar year (10MCY15), banking spreads averaged 5.62pc, down 38bps from the same period last year.

Lending rates during the period eased by 126bps to 9.81pc while deposit rates declined by 88bps to 4.2pc.

The shrinking banking spreads can be attributed to a variety of factors, including monetary easing (a cumulative 350bps dip in the policy rate during 10MCY15) and the adjustment in the interest rate corridor to curtail banking sector spreads.

During the first 10 months of the calendar year, banking spreads averaged 5.62pc, down 38bps from the same period last year

Going forward, it is likely that the spreads, along with the monetary easing cycle, have bottomed out. In addition, monetary tightening can be expected from the latter half of the next calendar year, which will likely lead to some improvement in spreads.

Monetary easing failed to trigger credit demand

According to data published by the State Bank of Pakistan (SBP), credit off-take by the private sector increased by Rs19.4bn, taking total outstanding credit to Rs3.3trn.

As per the seasonality of the credit off-take, credit demand starts picking up during September and October, as evident by the fact that in the past five years, average credit demand during October clocked in at Rs33bn.

However, credit off-take last month remained lacklustre as monetary easing has failed to trigger credit demand from the private sector. An industry-wide analysis reveals that the textile sector led the pack by borrowing Rs11bn during the month, while banks’ affinity towards consumer financing pushed up personal credit by Rs14bn.

However, food producers and the chemical industry cumulatively retired an amount of Rs13.2bn.

During 10MCY15, credit demand from the private sector remained sluggish at Rs19.9bn against an off-take of Rs86.6bn in 10MCY14. Major retirements during the quarter were made by the textile and food sectors worth Rs63.7bn and Rs57.9bn respectively.

However, credit demand is likely to pick up in the coming months due to seasonal factors. But in the medium term (2-3 years) the key trigger for credit demand will be the upcoming energy and China-Pakistan Economic Corridor projects.

Courtesy: Rohit Kumar/

Taurus Securities

rohit.kumar@taurus.com.pk

Published in Dawn, Business & Finance weekly, November 30th, 2015