KARACHI, June 4: The Economic Survey 2004-05 released on Saturday contains wrong data on the banking spread, or the gap between lending and deposit rates of banks. While discussing the interest rate environment, the survey says the spread between lending and deposit rates of banks rose from 384 basis points at end-June 2004 to 514bps at end-March 2005.

This means that the gap between weighted average lending and deposit rates of banks recorded a huge increase of 130bps, or 1.3 percentage points. The survey says that average lending and deposit rate of banks, which stood at 5.05 and 1.21 per cent, respectively, at end-June 2004, rose to 6.57 and 1.43 per cent at end-March 2005. Thus the difference between the two rates, which stood at 384bps or 3.84 percentage points at end-June 2004, went up to 514bps or 5.14 percentage points at end-March 2005. The arithmetic is right, but the problem is that the authors of the survey have not used the right set of data.

They have used the weighted average lending rates of gross disbursements of loans and then compared them with the rates of return on outstanding stock of bank deposits. Gross disbursements include the amounts of fresh loans and the loans re-priced, renewed or rolled over during a month. And, outstanding deposits are the deposits held within the banks at the end of a month. For the sake of accuracy in working out banking spread, the authors should have either compared the weighted average lending rates of outstanding loans with the weighted average rates of return on outstanding deposits. Or, they should have compared the weighted average lending rates of gross disbursement with the weighted average rates of return on fresh deposits. The reason is that like gross disbursements of loans, fresh deposits are defined as newly mobilized deposits plus the deposits re-priced or rolled over during a month.

Since the weighted average lending and deposit rates relating to outstanding loans and deposits are considered a better indicator of interest rate structure, the authors should have used the same set of data to work out the banking spread.

At end-June 2004, the weighted average lending rate on outstanding loans was 6.49 per cent and the weighted average rate of return on outstanding deposits was 1.21 per cent; the banking spread was 528bps or 5.28 percentage points. At end-March 2005, the weighted average lending rate on outstanding loans rose to 7.29 per cent whereas the weighted average rate of return on outstanding deposits inched up to 1.43 per cent. Thus the banking spread was at 586bps or 5.86 percentage points. In other words, the gap between weighted average lending and deposit rates widened by 58bps or 0.58 percentage points during nine months of this fiscal year.