KARACHI: Banking spread, which is the difference between lending and deposit rates, averaged 5.89% in February as opposed to 5.79% in the preceding month, according to the latest data released by the State Bank of Pakistan (SBP).
The improvement of 10 basis points on a month-on-month basis is because of a steep reduction in deposit rates. The deposit rate averaged 4.66% in February, which is down 28 basis points on a month-on-month basis. In contrast, the average lending rate offered by all banks on outstanding loans clocked up at 10.55% in February, which is 18 basis points less than the rate offered in January.
According to Hamza Kamal of Shajar Capital, the decline in the deposit rate is due to the immediate impact of a discount rate cut in January.
“We attribute the decline in lending rates to the banks’ strategy towards low-risk advances and to the competition within the banking sector to attract good customers,” he said.
On a year-on year basis, the banking spread came down by 16 basis points. The lending rate declined 64 basis points on an annual basis while the decrease in the deposit rate was 48 basis points.
The lending rate on fresh disbursements made in February decreased 85 basis points on a month-on-month basis to 9.5%. The deposit rate offered on fresh deposits in February decreased 42 basis points on a monthly basis to 5.36%. This resulted in the ‘fresh spread’ of 4.14% in February, which is down 43 basis points from the preceding month, SBP data shows.
Shrinking spreads typically reduce banks’ profitability, as they pay a higher interest on deposits while earn a smaller return on advances. Banks generally respond to such a scenario by investing more in government securities.
Kamal said the decline in lending rates is expected to boost credit demand to finance working capital needs. However, the demand for fixed investment will remain subdued, he added, owing to the challenging business environment.
“We are also less optimistic on private credit off-take of the banking sector, which is already facing tightened balance sheets,” he added.
According to the latest monetary aggregates released by the SBP, growth in credit to the private sector during July and February remained subdued: it clocked up at Rs158.9 billion as opposed to Rs298.3 billion in the same period of 2013-14.