ISLAMABAD, 3 December — Are the banks listening to the needs of the economy, the consumers, business, the industry, the investors, and savers? Are they listening even to the State Bank — the central bank that, under the law and even the much-suspended constitution, is supposed to be the “police station” for all banks. No. And, it appears no amount of cajoling, hand-holding, spoon-feeding and incentives will make the bank bosses listen.
Their latest act of defiance is the refusal to lower their impossibly high lending rates. It came after a 4 percent reduction — in three phases, in the State Bank (SB) benchmark discount rate. SB had cut the discount rate by 1 percent each in July and August this year, and a further 2 percent in October. It is now down from 14 to 10 percent within a span of four months. The objective was to enable the ever-pampered bank bosses reduce their lending rates for borrowers.
What prompted the SB to cut the discount rate? A continuing slump in the economy that had already brought down the GDP growth rate to the officially claimed 2.7 percent, but in fact much lower than that, in fiscal 2001. The travails of the economy increased further in the post-Sept. 11 situation.
The government-set growth target of 4 percent for the current fiscal 2002 is going hard to be achieved, as even the SB puts it around 3.5 percent and the Asian Development Bank projecting it at 2.6 percent this year and 3 percent next year. No less than Finance Minister Shaukat Aziz, foreseeing the difficulties, estimates the country will suffer a loss of $2.0 billion that comes to Rs.125 billion as a result of reduced exports, smaller tax revenues, slow process of privatization and a decline in investment flows.
An optimist as ever, Aziz, however, hopes that increased home remittances through official channels, a stable exchange rate and buoyant bourses may come to the country’s rescue. But, will that be? This being the scenario, the SB decision to slash its discount rate was in the right direction.
The economy needs a number of stimulants, and the SB provided a vital one. But, it had to be followed up by the commercial banks by reducing the lending rates in order to expand credit. Cheaper credit is essential to stimulate the economy not only to push for larger production in all fields, but also to lower the cost of production that is the need of the hour, to give the domestic consumers some relief, to ensure that the exports do not decline further on account of their higher prices.
But, the commercial banks, including the state-owned ones, have declined to reduce the lending rates. Their excuses have always been many — fallacious, groundless and untenable. This time around, it is their alleged lack of liquidity. They came out with this latest excuse when SB’s Deputy Governor Tawfiq A. Hussain urged nine Pakistani and foreign banks on Nov. 23, to slash the lending rates.
SB wants them to narrow the present big gap between lending rates to borrowers and profit rates for depositors. The bankers told him that a cut in the lending rates is not possible unless they come out of the present — and alleged liquidity shortage that they came upon them after Sept. 11.
“The interbank market is so short of liquidity that any attempt to cut profit rates for depositors will accentuate the shortage of the deposited funds. But, if the lending rates have to be reduced, the banks will have to slash profit rates on deposits, further.” I can sum up this argument just in two words: Sheer blackmail.
Did this blackmail work? At first glance, I will say yes. Instead of rebutting this fallacious excuse, and cracking down on the banks, the SB seems to have demurred and succumbed. A week has gone by that meeting.
But not even a word of remonstration from SB. The banks, as a result of their sheer persistent inefficiency, poor management, gulping huge bonuses and perks by their big bosses, have failed to reduce the financial intermediation cost.
Some of the bankers admit, they have failed to bring it down. The performance of the state-owned banks, in this connection, is particularly bad, while privately owned and foreign banks have done better.
