KARACHI, Aug 1: The spiraling impact of discount rate hike changed the interest rate scenario as the money became more costly for borrowers on Wednesday. The State Bank increased the discount rate by 0.5 per cent to 10 per cent effective from August 1, as part of its new monetary policy for six months till December 2007.
The immediate impact was witnessed in the money market where the 6-month floating rate, Kibor (Karachi Inter-Bank Offered Rate) increased by 29 basis points to 10.26 per cent. This will result into the higher lending rate.
The second major impact was seen in the Treasury bills rates where the benchmark 6-month T-bills rate increased by 19 basis points to 9.09 per cent and 12-month T-bills yield went up by 24 basis points to 9.4 per cent.
The latest data of the State Bank showed that the average lending rate for the fiscal ended on June 30, 2007, was 11.04 per cent while the previous year it was 9.79 per cent.
The most speculated issue after the monetary policy was the rise in lending rates and the analysts and bankers have different perception justifying their points with different factors. However, most of the analysts were of the view that in the presence of excess liquidity there was no chance for a big jump in the lending rates.
Atif Malik, analyst at the JS Research said that the latest discount rate hike could push the average lending rate by 1 to 1.5 per cent. He said the SBP’s move to shift 30 per cent load of export financing to commercial banks would result in outflow of Rs45 billion from the system. Last year, the export finance credit amounted to Rs150 billion, he said.
Head of research at First Capital Equity, Mohammad Irman Khan saw little chance of even one per cent increase in the average lending rate.
“If the lending rate is further increased by the banks, it will be difficult for them to use the liquidity they have,” he said.
Deposits of the banks have gone up significantly this year while more deposits are expected with the inflows of foreign exchange in the form of foreign investment and remittances, he said adding the lending rate could be up by 30 to 40 basis points in the coming months.
Bankers said lending rate hike would depend on appetite of the market. If the demand goes up, lending rate could see upward trend. They said the private sector credit growth substantially declined during 2006-07 and this could further decline if the lending rates go significantly high.
Analysts also differ over the impact of discount rate on the banking spread. According to latest information available from the State Bank, the banking spread for the fiscal 2006-07 was 7.4 per cent while previous year it was 7.25 per cent.
Bankers said that the State Bank’s encouragement to attract deposits for longer period could result in higher return on deposits. But the foreign inflows, which are converted into local currency and routed through banks, could be the decisive factor in the banking spread. If the banks find easy money, the spread would continue to stay at this stage or would increase further.
However, some analysts said the banking spread would come down because the fresh return on deposits had gone up significantly high.
Bankers said that the high return on T-bills opened a risk free investment for banks. If the market demand for liquidity remains low, the excess liquidity will find way towards the T-bills.
