Banking Spreads

Have you ever wondered why you can walk into a bank with your money and be told it would earn a certain interest rate. And a few minutes later if you ask for a loan from the same, youd be quoted a different interest rate?
The name of the game is banking spreads. Banks draw their core income from interest from the difference between interest paid on deposits and that earned from lending activities.
Banking spreads in Pakistan have risen to 7.6 percent in June, according to the SBP data. Spreads in the domestic economy have remained on the higher end, due to lack of other alternatives of financial intermediation.
Commercial bankers, well aware that consumers are likely to knock on their doors for deposits-a large chunk of which are interest rate insensitive- see little incentive in offering competitive borrowing rates.
High policy rate environments generally usher in higher banking spreads. Banks are hesitant to lend to the private sector, where the credit worthiness of borrowers is never free of worries.
A majority in the quantum of loans disbursed carry a floating interest rate linked to the Kibor. With the benchmark being raised to 12.35 percent in June, a hike of 11 bps over the previous month, "a hike in the spreads was inevitable", according to Hamza Marath at KASB Securities.
Rising NPLs and the associated increase in administrative costs at banks were found to be positively correlated to increasing banking spreads, in a research conducted by economists at Pakistan Institute of Development Economics in 2007.
"We expect banking spreads to continue rising in the next quarter" said Raza Jaffri at AKD Securities in a note to investors on Tuesday.
The already weak off-take of credit by the private sector is expected to continue in the months to come as banks are likely to park their cash in the safe-haven short term government debt.
So, if youve been thinking about drawing a loan from your local bank to start up a business venture, you might want to hold on to your thoughts for a few months.