KARACHI (November 12 2008): The State Bank of Pakistan Governor, Dr Shamshad Akhtar, has warned the banks not to raise lending rates from the current levels, otherwise, SBP would be constrained to either mandate the KIBOR or else abolish the system altogether.

Addressing bankers and industrial leaders at SBP Head Office on Tuesday, the Governor asked the bankers to provide the "asset repricing level to the SBP" from January 1, to date by Wednesday. She said that time and demand deposits constitute 40 to 45 percent of total deposits in large banks. These deposits have been repriced upward by 400 to 500 basis points (bps).

According to participants, banks have already priced in the expected 200 bps raise in SBP policy rate, due to the commitment to International Monetary Fund (SBP rate at present is 13 percent, while six months KIBOR is at 15.75 percent). Therefore, SBP wants banks to freeze KIBOR at this level, and not raise it further when the discount rate goes to 15 percent.

Earlier, industry representatives said that the mark-up rates being charged were back-breaking and making the industrial sector uncompetitive. If, indeed, there was a need to raise rates it needs to be done in a gradual manner rather than in spurts, they said.

The representative from a small bank said that they were taking in wholesale deposits at 18 percent. Therefore, the cost of deposits had gone up and, as a consequence, the banks have to raise the lending rates as well.

President of a large network bank said that banks would like the industry to function. Banks would favour earning 14 percent on loans rather than letting the loans go bad while charging 16 percent. However, the industry also needs to look inward, reduce cost and refrain from unethical practices.

Further, he said, it was not necessary for KIBOR to go up every time SBP raised its discount rate. The gap between the two is dependent on the quantum of liquidity in the system. At present, the pressure for loans on banks is so great that it may require credit rationing. Banks would need to provide loans for productive sectors and pull back from consumer financing in order for the economy to pull out of the present crisis.

In the end, SBP Governor asked the bankers not to travel, and remain in Karachi, as SBP would be holding one-to-one meeting between the bank and various chambers.

During the meeting, matter of Export Refinance Facility (ERF) Part-II facility was also discussed. Exporters strongly recommended that 100 percent ERF-II, like Part-I, should be extended by SBP, as previously financed, and they requested banks that at this crucial junction, banks should refrain charging excessive mark-up, which would affect the exports and the industry. Concluding the meeting, SBP Governor set up a Committee to finalise the recommendation for ERF-II, to facilitate the exporters.

Copyright Business Recorder, 2008