Quite ironically, with the lending pace outperforming the deposits growth during October, the markup on fresh deposits declined by 6 bps, at a time when average benchmark KIBOR jumped by 5 basis points. This comes in contrast to theory, which suggests that movements in lending and deposits rates should follow the movements of inter-bank borrowing rate.
With the industry slightly picking up since the start of this quarter, credit to private sector increased by Rs55 billion during October after a decline of Rs95 billion in the previous quarter. This coupled with a good chunk of money routing to government securities explains the surge in Kibor. However, following the trend since the start of this calendar year, the lending and deposits rates continued their slide.
After peaking in January at 7.78 percent, banking spreads moved in tandem with the movement of 6- month KIBOR. Usually, lending and deposits rate follow the benchmark KIBOR with a lag. But interestingly, the markup on fresh lending and deposits declined by 153 and 151 bps respectively between from Jan-Oct, whereas, the KIBOR fell by 278 bps in the same period.
Rates on outstanding loan and deposits, however, fell by 99 and 62 bps respectively, arresting the fall in spreads to mere 37 bps in the last ten months. In contrast, the spreads increased by 3 bps in the month before.
This explains the higher concentration of demand liabilities, especially current accounts, in overall deposits mix which limits the fall of spreads. But last months picture is slightly different with fresh lending rates falling two times to the deposits rate, which is due to high demand of credit by export oriented industrial sector and commodity based agriculture loans.
The gross advances virtually remained stagnant for the first three quarters of this calendar year, while deposits increased by 9 percent, pushing the advance-to-deposits ratio lower by 6 percentage points to 74 percent.
With virtually all the fresh money deposited in banks routed to government securities, there was no demand pressure on lending rates and all movement was virtually due to already issued advances linked to Kibor. However, for the last month advances increased by 1.3 percent against 0.2 percent increase in previous nine months. With Rs 37 billion credited to private sector in November and 1 percent growth in gross advances, the demand pressure on advances might exert northward pressure on lending rates. However, given the 50 bps cut in policy rate made by SBP last month, which clipped 25 bps off Kibor, spreads may continue their downward cycle and may fall by few bps in the coming months.
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