KARACHI, June 14: Banks have started raising the lending rates just after the announcement of budget 2007-08, holding the inflation and rising trends in mark-up rates responsible for the sudden interest rate increase.
Bankers say persistent high inflationary pressures have reduced the value of their profits that has forced them to jack up interest rates.
The first such hike was noted in the United Bank’s Cashline rates which were increased by up to 200 basis points and the bank has informed its customers giving the same reason.
However, no bank is ready to raise the rate of return on deposits despite the fact that depositors are getting negative return owing to rising inflation and it is very well reflected in growing banking spread which presently hovers around 7.4 per cent.
“Keeping in view the rising trends in mark-up rates, increased cost of funds and inflationary pressure, we would like to inform you that in accordance with the clause 4 of the agreement executed between you and the United Bank for UBL Cashline the bank is revising the mark-up rates for UBL Cashline effective from July 1, 2007,” said a letter issued by the UBL to one of its customers.
This was second increase in last one year which shocked the customers who availed the Cashline scheme. One such UBL client said that he utilised Rs150,000 one-and-half-year before at 18 per cent. Now the rate has gone up to 24 per cent.
“It puts enormous pressure on the clients who were using the UBL Cashline,” Umar Saleem, an employee of a private firm said.
According to new rates, if a customer uses 60 per cent cash out of his limit, he will pay from 23 to 25 per cent interest. The rates vary from customer to customer.
If the utilisation of cash is 60 to 80 per cent, then the rate will be 22.5 per cent to 24.5 per cent. From 80 to 100 per cent cash utilisation the rate will be 22 to 24 per cent.Banking sources said that all banks would go for further increase in the lending rates. Mark-up on consumer financing is the highest at 19 per cent per annum. These high interest rates have curtailed the potential of growth in this sector and the growth slashed from 70 per cent to 12 per cent in three years.
However, the most concerning question related with the high interest rates, are the chances of default. The State Bank has been warning the banks that very high interest rates are prone to default.
The third quarter of the current fiscal showed that the default had suddenly increased
The banking sector registered the non-performing loans increase of Rs11bn between December 2006 and March 2007.
The State Bank has indicated it will continue tight monetary stance in next monetary policy expected to be announced in July to bring down the inflation and control the rising interest rate trend.
Bankers said the lending rates would see significant rise in upcoming months as the economy would see mounting inflationary pressure.
High interest rates have already curtailed the lending to private sector which has slowed down the trade and manufacturing growth.
