Banks lending charges may go up to 13 percent: July-December 2007 Monetary Policy unveiled

SBP discount rate increased by 0.5 percent, 13.7 percent monetary expansion target: The weighted average lending rates in the banking system are expected to rise from 11 to 13 percent on account of the 0.5 percent rise in SBP's lending rate to banks.
The Governor of the State Bank of Pakistan Dr Shamshad Akhtar, at a press conference on Tuesday, announced the hike in policy discount rate (ie, cost of 3-day borrowing by banks from SBP) from 9.5 to 10 percent with effect from August 1, 2007.
The rise in SBP's discount rate had become an imperative as the gap between SBP's lending rate to banks and their yield from short-term government paper (Treasury Bills) had narrowed and the banks were not investing in three and six months paper. The increase in discount rate is now aimed also to ease demand pressure emanating from food inflation by diluting the second round impact arising from the rise in wages.
Export Finance: Governor Akhtar also announced modification in the refinancing limits and resource sharing arrangement for Export Finance Scheme (EFS) to reduce its contribution in reserve money growth. She said, henceforth, banks would provide 30 percent of liquidity for EFS from their own resources and SBP, instead of providing 100 percent funding under this scheme, would contribute only 70 percent: "The banks will be required to ensure that this total outstanding refinance from SBP as of June 30, 2007 is reduced steadily by 30 percent latest by June 30, 2008".
"The other terms and conditions of revised EFS would remain the same. In particular, the refinance rate to banks will remain below the benchmark six month T-bills and banks' lending rates to exporters will not exceed 7.5 percent per annum", she added.
Governor Akhtar also announced reduction in the present Cash Reserve Requirement (ERR) from seven to zero percent for all deposits of one year and above to encourage greater resource mobilisation of longer tenor. "As an interim support during this transition the amount of export finance provided by banks from their own resources would be eligible for deduction from their demand and time liabilities for determining CRR." At present, banks maintain three percent of the demand and time deposits of less than six months as CRR with SBP.
SBP intends to shift a portion of the saving made due to the reduction in the liquidity provided under the export finance regime, towards a new Long Term Financing Facility (LTFF). SBP will provide 70 percent funding to participating banks and DFIs, for purchase of imported and local plant and machinery to finance export oriented projects with 50 percent of their sales constituting exports, or if their annual export stands at $5 million - which ever is lower, said the Governor.
The change is CRR requirement will have a marginal cost impact on banks. At present, on the average 6.3 percent of their total liabilities are maintained in CRR. With the change announced by the Governor on Tuesday, the banks would now maintain 6.2 percent of their deposits under CRR with SBP.
In order to encourage big business to take advantage of lower lending rates in foreign currency, the corporate sector has been allowed to access international markets for funding needs. SBP intends to further liberalize and rationalise its External Commercial Borrowing Scheme (ECBS) for industry and exporters. We are doing away with SBP approvals, said Governor Akhtar, and lenders can have different product structures and maturities within the stipulated pricing range.
Further, she said, hedging of exchange exposures and forward cover facility will now be available under all categories in ECBs and derivative dealers are being allowed to provide this to exporters.
Before concluding the press conference, the Governor said there were only five million borrowers and 20 million depositors in Pakistan. In order to promote banking activity, SBP has asked banks to encourage the public to open Basic Banking Accounts (BBA) and not recover any charge from customers for operating BBA or for conversion of regular full service bank accounts. Moreover, she said, banks are being advised not to recover service charges of more than Rs 50 per month from their regular account holders on maintaining balance below the minimum monthly average balance.
She said banks would be required to open 20 percent of their new branches or sub-offices in rural and underserved areas to offer financial services to rural population.