Banking spreads fall 29 basis points
Industry’s reliance on govt instruments continues.
KARACHI:
Banking spreads fell by 29 basis points in August as outstanding loan and deposit rates move in opposite directions, according to data released by the State Bank of Pakistan.
Spread refers to the difference between the interest rate a bank charges a borrower and the interest rate the bank pays a depositor.
Lending rate declined by 11 basis points while deposit rate jumped by 18 basis points in August, according to an InvestCap research note. Hence, spreads stood at 7.59% compared with 7.56% during the same period last year. Spreads were at record high of 7.88% in July.
Solid return on government securities proved to be a vital ingredient in the banking sector’s growth, says the note.
Banks have been keen to take more interest in government instruments because of lower credit risk and higher returns at the same time. Of Rs3.1 trillion outstanding government securities, scheduled banks hold Rs2.2 trillion or 71% while rest of the portion is held by non-banking institutions and the corporate sector, says the note.
Despite decline in spreads, lending rates in particular, rise in the Non-Performing Loans (NPLs) is becoming a challenge for the entire banking industry.
NPLs of all banks reached Rs580 billion during the first half of 2011, which is discouraging banks from making advances to the private sector, dampening economic growth on the whole.
In the wake of substantial 200 basis points cut in the last two monetary policy statements announced by the SBP, Kibor has been forced to shed 144 basis points to 11.94% in three weeks. This is expected to bring banking spreads further downwards, says the note.
Published in The Express Tribune, October 13th, 2011.
Banking spreads fell by 29 basis points in August as outstanding loan and deposit rates move in opposite directions, according to data released by the State Bank of Pakistan.
Spread refers to the difference between the interest rate a bank charges a borrower and the interest rate the bank pays a depositor.
Lending rate declined by 11 basis points while deposit rate jumped by 18 basis points in August, according to an InvestCap research note. Hence, spreads stood at 7.59% compared with 7.56% during the same period last year. Spreads were at record high of 7.88% in July.
Solid return on government securities proved to be a vital ingredient in the banking sector’s growth, says the note.
Banks have been keen to take more interest in government instruments because of lower credit risk and higher returns at the same time. Of Rs3.1 trillion outstanding government securities, scheduled banks hold Rs2.2 trillion or 71% while rest of the portion is held by non-banking institutions and the corporate sector, says the note.
Despite decline in spreads, lending rates in particular, rise in the Non-Performing Loans (NPLs) is becoming a challenge for the entire banking industry.
NPLs of all banks reached Rs580 billion during the first half of 2011, which is discouraging banks from making advances to the private sector, dampening economic growth on the whole.
In the wake of substantial 200 basis points cut in the last two monetary policy statements announced by the SBP, Kibor has been forced to shed 144 basis points to 11.94% in three weeks. This is expected to bring banking spreads further downwards, says the note.
Published in The Express Tribune, October 13th, 2011.