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Rate cut to bring down cost of govt borrowing.

KARACHI -- The cut in the discount rate would help the government to borrow at a relatively cheaper rate.

The banks inclined to minimise risk by lending to the government may still stick to their old policy despite a decline in their profit margin after the rate cut, said industry sources and analysts.

The State Bank has reduced the policy interest rate by 50 basis points in the monetary policy announced on Friday that was termed a meagre reduction by analysts since the real interest rate is still as high as 3.5 per cent.

Bankers said the cut in the interest rate would reduce the Karachi Inter Bank Offered Rate (Kibor) by 40 to 50 basis points and the benchmark six month rate could be around 9.10 to 9.20pc on Monday.

Currently the six-month Kibor is 9.60.

However, the rate cut was criticised by many analysts who were expecting a bigger cut, at least by 100 basis points. The small cut of 50bps was still in favour of banks and would not help boost private sector credit off-take.

`The State Bank has made the right decision to cut interest rate by 50 basis points because nowhere in the world you can sustain high interest rate that hampers private investment, said Mohammad Suhail, Chief Executive to Topline Securities.

He, however, said `we may see another cut in near future once there is clarity on funding from IMF, Saudi Arabia, and US (Coalition Support Fund).

Bankers showed their commitment to continue to fund the government which is still the best risk free profit making investment.

Banks are the real beneficiary of the high real interest rate which was 4pc before this cut announced on Friday.

This is irony that most of the tax-payers` money is paid to banks and the banking industry is flourishing with this money. `It is not our fault. The government borrowed banks` money, paying the rent which we pass it on to the customers,` said a senior banker.

Banking spread has been high above 7pc that means banks keep most of the profits in their own pocket while depositors get negative returns. Since the inflation has been falling and reached 9-year low in May at 5.1pe, the real interest rate rose to 4pc.

Even after a cut of 50bps banks will continue to reap high profits with 3.5pc real interest rate.

The State Bank said in its monetary policy that the cut was introduced in the wake of falling inflation and poor investment to private sector. Since the real interest rate is still 3.5pc and is risk-free, lending to private sector would remain stagnant, said banking sources.

The private sector lending by the banks fell to record low during the 11 months of this year.

According to State Bank, only Rs9bn were lent to the private sector during this period.

This low private sector credit off-take proved disastrous for the economy which could see a growth rate of 3.3pc at the end of the current fiscal year.
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Publication:Balochistan Times (Baluchistan Province, Pakistan)
Date:Jun 24, 2013
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