KARACHI, Nov 16: Better late than never. The State Bank has finally cut the discount rate by 1.5 percentage points to 7.5 per cent. This is the first rate-cut of this fiscal year. The SBP notified the rate-cut through a circular issued to all banks on Saturday.

The discount rate is the rate at which the banks can borrow funds from the SBP for up to three days against the government securities like treasury bills and long-term investment bonds.

The 150 basis points cut in the discount rate is seen by the financial sector as a major move towards persuading banks to offer cheaper credit to the private sector to lift the sagging economy.

Economists and business leaders had long been waiting for this move. So for them the rate-cut is somewhat belated. The SBP had last cut its discount rate by one percentage point to 9 per cent on January last year.

“This rate-cut was very much wanted...and it should have a bit earlier,” said a former vice chairman of All Pakistan Textile Mills Association Mushtaq A. Vohra. “Had the SBP lowered the discount rate a little earlier this would have a larger impact on the economy,” he said when reached by Dawn over telephone. But he said the easing of the monetary policy would definitely help the private sector boost production provided the banks make immediate downward adjustment in their lending rates.

Seasonal private sector credit picks up in September-October and lingers on through December. Bankers say they see borrowing activities until March in one way or the other but afterwards it is time for credit retirement.

That was why economists have long been waiting for the SBP to ease off its monetary policy by or before the credit offtake season. They were of the view that with the exchange rate stable and inflation under control the economy could well afford further easing of the monetary policy. But the SBP had some other concerns including the likely impact of a rate-cut on the profitability of the banks holding large stocks of the treasury bills.

“When it comes to easing or tightening the monetary policy you always have to trade off one set of things with the other. Those sitting outside the SBP building cannot realize this,” said a SBP official who refused to be named. Senior SBP officials had a two-hour brainstorming session on Friday to debate the necessity — and the extent of a discount rate-cut. As usual the central bank announced the rate-cut on Saturday—and that too after business hours to ensure that banks having close links with the SBP do not take “undue advantage of this privileged piece of information.”

Senior bankers had, however, got wind of a possible rate-cut after Friday’s meeting of Monetary & Exchange Rate Committee of the SBP. “The rate-cut is on the table...we just want to know by how many percentage points,” said treasurer of a bank who was in his office till late on Saturday afternoon.

But this eagerness being displayed by the bankers to know the extent of rate-cut should not lead businessmen to think that they will be equally willing to reduce their own lending rates. “The problem here is the SBP cuts its discount rate but the banks do not in turn lower their own lending rates,” complains Mushtaq A. Vohra.

Figures support his statement. In the last fiscal year the State Bank of Pakistan lowered its discount rate by five percentage points to 9 per cent but the weighted average lending rates of all the banks combined fell only by 62 basis points to 13.12 per cent.

This was one of the reasons that depressed the private sector demand for bank credit. In the last fiscal year the private sector borrowed Rs30 billion from the banks against the annual credit plan target of Rs98 billion.