KARACHI, July 2: The lowering of the profit on national saving schemes by up to 2.5 per cent is going to push banks to cut their lending rates in the first half of this fiscal year.
“The rate cut on NSS should help the banks have a fresh look at lending rate structure as it would improve their ability to raise deposits,” says chief of operations of state-run National Bank R. A. Kaleemi.
He would not hint at the quantum of possible reduction in the banks lending rate but insists that it should be “substantial”.
Kaleemi admits that the rate cut on NSS combined with lowering of tax rate on banks income announced in this budget should give the banks enough room to slash their lending rates. But he warns that the bank clients should not expect an across-the-board reduction because “banks are getting more and more cautious about credit quality.”
Head of credit division of state-run Habib Bank, Sohail Malik, also says that the reduction of NSS rates will definitely improve banks ability to revise their lending rate structure. Malik, too, would not say how much fall cold be expected in the banks lending rate but he warns that if the private sector credit demand does not pick up banks would find it difficult to lower lending rates.
“There is always a time lag after which the banks respond to changes in monetary policy or NSS rate structure. But eventually they catch up with the trend,” Malik says. “I hope this will be true in the NSS rate cut also but we should not forget that any change in the banks lending rates would be purely market driven.”
Three state-run banks (NBP, HBL and UBL) together made a 1.55 per cent cut in their weighted average lending rate between July/May 2001/02: The rate fell from 13.91 percent at end-June 2001 to 12.36 per cent at end-May 2002. But during the same period they also lowered their weighted average deposit rate by 75 basis points. Or their weighted average lending rate declined by only 80 basis points (or 0.8 per cent).
Senior executives of local private and foreign banks also say that the NSS rate cut would enable them to raise deposits at cheaper rates thus creating room for more cuts in their lending rates.
All local and foreign banks combined reduced their weighted average lending rate by 1.57 per cent during July/May 2001/02: The rate fell from 13.74 per cent at end-June 2001 to 12.17 per cent at end-May 2002. But at the same time they also lowered their weighted average deposit rate by 70 basis points to 4.30 per cent. In other words the weighted average lending rate of all the banks declined by only 87 basis points (or 0.87 per cent).
“It is shocking to see that the banks have made only a marginal cut in their lending rates in the outgoing fiscal year,” says Vice President of FPCCI Haroon Rasheed. “The State Bank kept in operation a very favourable monetary policy last year and made big cuts in its discount rate and treasury bills rate. But the banks response to the central bank policy was not up to the mark.”
But bankers say one of the reasons why they could not make a deeper cut in the lending rates was that the demand for private sector credit was sluggish. What about it? “Heads of banks keep saying such things without ever realizing that the middle and low tiers of bankers are less interested in lending money. They just want to keep borrowers away on one pretext or the other.”
Rasheed says that after a cut in the NSS rates the banks must respond quickly and lower their lending rates substantially so that the financial cost of doing business may become affordable.