Interest rate spread starts receding

Interest rate spread, defined as the difference between the average yield on earning assets (average return on advances and investments) and average cost of interest liabilities (average cost of deposits and borrowings), receded to 3.4 percent at the end of calendar year (CY) 2004.
On CY basis, interest rate spread, which averaged 2.7 percent in the late 1990s to CY99 (a minimum of 2.4 percent in CY97 and a maximum of 3.1 percent in CY98), increased to an average of 3.5 percent in the subsequent 2000s to CY04 (a minimum of 3.0 percent in CY00 and a maximum of 3.8 percent in CY01).
A rising trend in the spread, the one witnessed in most recent 2000s in the developing countries like Pakistan, indicates that a relatively lower return is being paid to the depositors. Such lower return becomes all the more painful during a period when it is marked by rising inflation, at the same time.
That exactly was the case in CY04. The depositors had also to bear the brunt of minimum balance fines charged by almost every big bank nowadays besides the usual deduction of Zakat.
Such a situation should normally not be allowed to exist, but it appears that the central bank in Pakistan, cognisant of the burden of provisions against bad and doubtful debts required under the re-enforced Prudential Regulations, has so far taken a lenient view.
Average return on advances and investments generally rose to an average of 10.7 percent in the late 1990s (a minimum of 9.8 percent in CY96 and a maximum of 11.7 percent in CY98) but started declining in the early five years of the 2000s, averaging 7.6 percent during the period (a minimum of 4.9 percent in CY04 and a maximum of 9.9 percent in CY01).
It is hoped that the spread would improve to the benefit of depositors as return on advances and investments rise further, in a scenario where monetary policy is being tightened during the last about 10 months of CY05 and is expected to be pushed in the same direction in the ensuing CY06, and the onus of provisions would get moderated.