An ongoing gradual shift from fixed to floating interest rates has created an unprecedented volatility in the market to the discomfort of many borrowers and bankers.
The bank lending rates vary from one extreme of around four per cent for corporates to another extreme of around 19-20 per cent on micro-finance provided to the poor. There is very wide gap of around 15-16 per cent between the two lending rates.
To quote a banker: “there are no market creditable yardstick rates to peg the floating lending rates, causing an element of distortion in commercial loans.”
In the developed money markets, credible floating rates exist because of credible market yardstick rates to which the floating rates are pegged.
Unlike London Inter-Bank Offer Rate (LIBOR), that sets the most reliable quoting yardstick rate for corporates, the Karachi Inter-Bank Offer Rate (KIBOR) is a 3-4 minutes formality, say senior bankers.
It is entirely different in the domestic market. Interest rates are often quoted without a floor rate and a cap which is the normal practice in developed markets and transactions are concluded on that basis.
It is treasury bill rates that serve as an anchor in borrowing and lending business. The T-bill rate is seen as a vehicle designed to reduce government borrowings costs.It is not market-oriented.
The interest rates in developed markets vary with the terms and from bank to bank, the differences in the rates quoted by various banks are exception rather than the rule. Normally,these differences tend to be zero, says a banker who has served in a London financial institution.
Similarly, loans to individuals differ widely from bank to bank. For a housing project launched by the Defence Housing Society in Karachi, Askari Bank offered loans to apartment buyers at fixed rate of 8.5 per cent. Meezan matched it with a floating rate of one per cent above T/bills, whose yields currently ranges between 1.25-1.5 per cent.
The interest rates vary not only from bank to bank but differ for different category of the borrowers,trade-wise and size-wise. And those less conversant and ignorant about banking practices get the worst deal. The big corporates strike the best bargain and the small borrowers are left at the mercy of the market. Generally, the corporates get loans at four per cent but SMEs get it at rates ranging from 8-12 per cent depending on the tenor and the customer. The credit cards carry interest rate of 18 per cent which goes up to 22-24. The loans advanced by the Poverty Alleviation Fund through NGOs is reportedly around 16 per cent. Consumers are given loans that cost 14-16 per cent. With banks awash with liquidity, the greatest beneficiary is the government with going treasury rate at 1.25 per cent. The low treasury rates have helped the government retire expensive old debts.
Car loans range between 8-9 per cent that ultimately cost, in most cases, 11-12 per cent. The cost of documentation ranges from Rs1500-Rs5000 and the banks take 0.5 per cent commitment charge on loan.
The bankers say that the loan is priced keeping in view the cost of servicing and the degree of risks involved in lending to a customer. Costs are also linked to the volume of business that a client generates for the bank. Bulk purchase of commodities and bigger loans are cheaper. In practice, this argument has been stretched beyond the acceptable limits. In case of small borrowers, the risks are lower though servicing costs may be somewhat higher.
The Poverty Alleviation Fund finances small borrowers through NGOs reportedly has at around 16 per cent. Similarly, the government gets loans from the Asian Development Bank at one per cent service charge. The credit goes to the Micro-Finance Bank and the poor borrowers get loans at 19-20 per cent. The poor are being fleeced by usury.
It is argued that the local interest rates for different category of borrowers is designed on the same pattern as that prevailing in the United States. But it is forgotten that US lending/borrowing game has ended up in putting the American consumers, corporates and government under heavy debts. Since the dollar is the anchor of world trade, the greenback accumulates in banks in New York and is lent to the US government and the corporates. Pakistan does not enjoy any such position.
The American concept of free market does not lead to enough accumulation of capital in the hands of the corporates or consumers to manage finances through prudent borrowing. It has reduced the scope of deposit-lending business forcing banks to look for fee-based incomes which again erode the incomes of the poor and small borrowers. Industrialization brought in standardisation and uniformity. In pre-industrialization age, there were no accurate weights and measures. With no creditable yardstick, the interest rates volatility has pushed back the banks into the mediaeval age.
When it comes to small savers, the tables are once again turned against the poor. For large banks, the return on PLS account is as low 1.50-1.60 per cent , much below the inflation rate of 3-4 per cent. The poor getting a raw deal at the hands of the policy makers.
In formulating monetary policy, seasoned bankers say that” the core consideration is that the price of money remains at a level that does not benefit the borrowers at the expense of the savers or vice-versa. It implies maintaining equity between borrowers and savers so that the benefits of economic growth are shared fairly between them.”
Of course, neither the State Bank, nor the IMF nor the government is worried about it. The IMF is however concerned that “the rate of return on NSS certificates are higher than those on deposits with commercial banks of similar maturity.”
And the Fund views the difference as” an implicit subsidy which reflects the government’s intention to promote private savings.” In this fiscal account, the implicit subsidy is included in the interest bill,subsidies are thus understated while interest costs are over-stated, it adds.
The IMF has all along been emphasising that the rates of return on NSS should be tied to comparable financial instruments. At a minimum, the premium over Pakistan Investment Bonds should be eliminated. The fund fails to distinguish between NSS certificates which are bought by individuals and the Pakistan Investment Bond (PIB) which are purchased by institutions. The IMF is very keen to impoverish the educated middle class that is the backbone of any economic or social progress or drive them out to foreign lands to serve it’s major share-holders.
It says: “Given that the very poor do not command sufficient resources to invest in the NSS, the implicit subsidy does not appear targeted to those most in need of government assistance.Its concern is limited to NSS and it is not bothered about the poor when they suffer at the hands of lenders. It has no objection to how the poor are being fleeced by Micro-Finance Bank and Poverty Alleviation Fund and their NGOs allies.
To quote a seasoned banker: “Pakistan’s financial services sector is still archaic. It is incapable of quickly transmitting the effect of large scale interest cuts down the line.”