Banks, in response to State Bank's move for increasing interest rates, have started raising the borrowing rates and are preparing to increase the return on deposits also, said banking industry sources. The State Bank on last Monday increased the discount rate by 1.5 percent to 9 percent from 7.5 percent to contain the rising inflation through increase in interest rates. Bankers said they would respond slowly to SBP's discount rate strategy as the market at present has ample liquidity.
However, some bankers said that in the presence of high liquidity, banks might not increase interest rates as per the will of the SBP. "We are thinking of increasing the borrowing rates at least by one percent," said a local banker. After two-and-a-half years the SBP raised the discount rate. The State Bank has been gradually increasing interest rates, which did not produce the required result. So it had to opt for a big jump.
Industry sources said that the leasing sector has not yet responded to SBP's higher interest rate move. They said that the sector was already charging higher interest and it might take some time to adjust with the new situation.
Last week the SBP sucked up the whole of offered money for treasury bills to bring the overflow of liquidity causing inflationary impact on the economy.
The SBP sold 3-month and 12-month T-bills and accepted the whole amount of Rs 102 billion, which was another move, after increasing discount rate, to calm down the heating inflation which has already crossed double digits.
Bankers said that the government might allow them to increase their investment in National Saving Certificates to divert the liquidity from the market to fixed investment. The government could even increase return on the NSS to get control over liquidity, they added.
Bankers said that higher return on deposits would be additional effort to persuade the investors to keep their money in the banks instead of rolling in the market.
The private sector off-take reached Rs 347 billion till March while the revised target for the whole fiscal year was Rs 350 billion, which showed rapid growth in the private sector. The inflationary pressure might take the total private sector off-take to Rs 450 billion by the end of current fiscal year.
Increase in the interest rates might slow down the off-take but financial market experts said that it would hurt the overall growth, especially in the manufacturing sector. The credit off-take is not the dominant part of industrial products or manufacturing sector, they said.
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