ISLAMABAD, 25 November 2002 — The Pakistani central bank has made two significant decisions that will reduce commercial banks’ lending rates, and has allowed, for the first time, launching and sale of foreign branded financial products in the country.
The decision of the State Bank of Pakistan (SBP), the central bank to reduce its benchmark discount rate from 9 to 7.5 percent will move all the commercial banks to reduce their lending rates to meet the growing credit demand. Cheap credit will also help boost the economy whose traditional 6.0 percent growth rate has declined to around 3 percent.
The sale and launching allowed for branded financial products of foreign banks and financial institutions will open a lot of business opportunities for them, as well as their collaborating Pakistani banks. Another SBP move will facilitate importers and exporters to benefit from longer-term and better credit.
SBP decision to lower the discount rate by 1.5 percent from 9.0 to 7.5 percent, signals the commercial banks to lower their own interest rates, they charge their clients, specially medium and small borrowers. SBP said: “It has been decided to further reduce the minimum rate of return to be paid by recipients of financing facilities from the SBP for meeting temporary liquidity shortages and the SBP’s 3-day repo facility.” The new rate, on an annual basis, effective Nov. 18 will be for the central bank’s liquidity facility against government of Pakistan market treasury bills and Pakistan investment bonds (PIBs).
The discount rate cut was expected for nearly two months as cotton crop season starts in September-October and the sugarcane season in October-November. These two biggest cash crops of the country require huge quantities of bank financing from growers to processors and exporters. This demand lasts until the month of March. Retirement of this credit starts in April or thereabout.
For more than a year, SBP was gradually lowering the discount rate from 14 to 7.5 percent in order to ease the monetary situation. The objective was to reverse the squeeze and let the economy breathe. But the commercial banks have been resisting in letting it happen. Inspite of all the SBP’s rate-cutting, the previous one being 9 percent on Jan. 22 this year, and now to 7.5 percent, the banks’ lending rate, so far, has declined a mere 0.62 percent.
At an average the lending rate has stayed at 13.12 percent. But the blue-chip customers do get special, preferential rates, a vast majority of borrowers still have to pay much higher. It is sometime as high as 18 percent. The low credit offtake by the private sector confirms it. In fiscal 2002 only Rs.30 billion were borrowed by the private sector against the SBP’s credit target of Rs.98 billion. The credit disbursement even in the first five months — July-November — of the current fiscal 2003, is very low. The potential needs of the private sector are much higher than even Rs.98 billion. The result was SBP’s good moves did not impact the business, industry and other credit- starved sectors including the need for working capital.
There are not many takers for new investment finance for two reasons: The rate of interest is too high, and the banks have been preferring to invest in government securities that are safe and yield high returns. Now when the yield on government securities has been reduced, one reason being the discount rate cut, will it make them less attractive for the banks and encourage them to lend more, and lend cheaply?
So far, they are just not ready to finance private sector, fearful of default that was experienced by all the state-owned banks during the 1990s, both because the banks doled out credit carelessly, the takers swallowed the money, or their businesses failed. That fear still lingers. This situation has resulted in a lack of new investment, and upgradation and modernization of Pakistan’s largely obsolete industry.
In such a situation how will Pakistani industry, business and exports enter, and stay competitive, in the post-2004 WTO global market? While the banks have failed to respond on the SBP’s initiatives, the central bank itself has been unable to get its policies implemented.
To some extent it may be right for SBP Governor Dr. Ishrat Hussain to say that the central bank cannot force the commercial banks to slash the lending rates. But, then who will? Even now most of the banks, including the state-owned banks, have not moved after the latest discount rate cut. If they have to reduce the rate, the bankers are thinking in terms of around one to 1.5 percent, that too, not immediately but after one to three months. Most of the bankers are talking about reducing, to some extent, the interest rate for medium and small borrowers on a case-to-case basis — and not across the board — which in fact, what the SBP wishes.
Even if the central bank forces down an across the board reduction, the economy will be passing through the third quarter of this fiscal year, and its good effects may not fully appear by the time 2003 closes June 30.
However there is a predominant view in the banking industry that in order to be able to maintain or increase their overall profits the banks will have to lower the lending rate so that they can attract more borrowers. They will also have to introduce new financial products, besides reducing the profits on deposits.
The bankers also see potentially good business prospects in the SBP’s permission for them to enter consumer financing.
