KARACHI, Aug 10: Banks’ average deposit rate rose to 1.85 per cent in June 2005 from 1.21 per cent in June 2004 showing a nominal increase of 64 basis points only.

But average lending rate rose faster and shot up to 8.21 per cent in June 2005 from 6.49 per cent in June 2004, recording a big rise of 172 basis points, according to data released by the State Bank.

Consequently the gap between banks’ average lending and deposit rates widened to 6.36 percentage points in June this year from 5.28 percentage points in June last year. This increase in the banking spread has irked businessmen who demand a say in policy making to block the repeat of such episodes in future.

The Federation of Pakistan Chambers of Commerce and Industry has already demanded setting up of a panel of experts for advising the SBP on monetary policy.

The FPCCI President Ch Muhammad Saeed wants one of its own representatives on the panel. And now the chairman of the FPCCI standing committee on banking Dr. Mirza Ikhtiar Bag says the need of the hour is to set up an independent consultative board for monthly review of banks’ credit policies and their lending and deposit rates, etc.

Currently there is a National Credit Consultative Council whose job is to draw a credit plan for the nation and there are credit advisory committees that take up day to day problems of exporters with the banks. The NCCC meets twice a year and credit advisory committees meet twice a month. “What we need is a type of consultative board with representatives of exporters, industrialists and parliamentarians who can challenge banks’ policies of public interest like their policy on lending and deposit rates,” says Dr. Baig. “This board should meet every month and help the central banks oversee banking affairs more efficiently.”

Banks’ average lending rate kept rising during the last fiscal year as the central bank struggled to keep inflation in check amidst faster-than-targeted economic growth and mismanagement in food supplies. Inflation as measured by consumer price index moved at an average rate of 9.28 per cent in the outgoing fiscal year against the target of five per cent. The economy grew by 8.4 per cent faster than the target of 6.6 per cent.

For the current fiscal year the government has targeted seven per cent growth in economy with eight per cent increase in inflation. The central bank is still pursuing a tight monetary policy but is allowing room for banks’ credit expansion required for the targeted economic growth.

Business leaders fear that if banks’ lending rates continue to rise, the resultant increase in their financial cost would make their value-added exports uncompetitive in the world markets affecting economic growth adversely. On the other hand, people see a slower pace of increase in deposit rates as a sign of banks’ failure to pass on the benefits of the mid-1990s IMF-World Bank sponsored banking reforms, which threw thousands of surplus bankers out of job to cut banking costs.

But bankers say one has to look at the pace of increase in fresh deposit rates instead of the rates on the overall stock of deposits, to see how the rates are moving. According to SBP data, average deposit rate of all the banks combined stood at 3.38 per cent in June 2005, far higher than the average return of 1.85 per cent on overall deposits.