THE average lending rate of banks fell 41 basis points in November 2011 in line with a big 150bps cut in the State Bank’s key policy rate announced on October 10. In the month of October, a rather nominal fall of 17bps was seen in the average lending rate.In other words, fresh average lending rate (including zero mark up but excluding inter-bank rate) depicted a total decline of 58bps in October-November, primarily due to slashing in the SBP policy rate.
The reduction in interest rate has helped boost private sector credit demand and private sector’s borrowing from banks which remained negative during the first quarter, shot up to Rs115 billion by December 16, latest data released by the SBP reveal.Most of private sector credit demand is coming from cotton ginning and textiles, sugar, rice, leather, pharmaceutical and other export sectors.
“Importers of food items and industrial raw materials as well as fuel oil are also making big borrowing. And lately, we have seen some activity in consumer financing, particularly auto and personal loans,” said head of credit division of a large local bank. At Rs115 billion, the volume of net private sector borrowing between July 1 and December 16 this year is higher than what it had borrowed in the same period of last year—Rs 82 billion.
Senior bankers say whereas falling interest rates encouraged the private sector to go for big net borrowing from banks, retirement of loans by public sector enterprises or PSEs created room for accommodating rising demand for private sector credit.
Between July 1 and December 16, PSEs made net credit retirement of Rs272 billion as the government struggling with its own fiscal woes forced them to keep their financial house in order. In the same period of last fiscal year, PSEs had rather made a net borrowing of Rs6 billion from banks.
Bankers say, huge retirement of PSEs loans this year also made it possible for the banking system to continue to meet borrowing requirements of the federal and provincial governments. Federal government borrowing from banks saw a seven-fold increase this fiscal year to Rs624 billion (up to December 16) from less than Rs90 billion in the same period of the last year. The volume of provincial government’s borrowing from banks also recorded a six-fold increase to Rs24 billion this fiscal year (up to December 16) from just Rs6 billion in the comparable period of the last year.
Senior bankers say, larger government sector borrowing from banks had crowded out the private sector till the end of October. But from November onwards, when interest rates began to fall, the demand for private sector credit picked up and now is in full swing.
“Any further decline in interest rates (as a result of the October 10 easing) is out of question as the central bank has announced to keep its policy rate unchanged at 12 per cent for December 2011 and January 2012,” said a senior executive at state-run National Bank of Pakistan.
“But other market forces like movements of T-Bills’ yields, demand in private sector credit, changes in KIBOR, cost of deposit mobilisation of banks and rate of loan defaults would continue to affect average lending rates. Besides, if the central bank opts for further easing in February-March that would bring interest rates further down.”
According to senior central bankers, the full impact of policy rate cut is felt in the financial market within six months to one year. But if that is so, what is the rationale behind reviewing monetary policy every two months? Businessmen ask this question when they see that even a deep cut in policy rate translates into just a nominal decline in average lending rate of banks in next two months—and then the market readies itself to take clues about interest rate movements from another review of the monetary policy stance.
“Actually financial markets are evolving in Pakistan. We do not have a sizable bond market. Our secondary market for debt instruments is also in its infancy. Corporate bond issues are rare. Banks do not publicise their prime lending rates. General level of awareness about financial markets is low and transparency in banking and brokerage businesses is still an issue.
“All these things make smooth transmission of monetary signals difficult,” said president of a foreign commercial bank. In the recent past, the SBP and the government have brought in greater discipline in the auctions of treasury bills and Pakistan Investment Bonds. For example, a quarterly calendar of their auction is unveiled in advance.
“I hope the SBP monetary signaling, both through review of the monetary policy as well as through its day-to-day open market operations, will be picked up by financial markets wisely and its impact will be felt more in time as our markets mature.”