KARACHI, Nov 13: Banks and Development Financial Institutions (DFIs) have been found increasing the interest rate fixed at the time of loan agreement.

The issue was seriously taken up by the State Bank as it said that some of the banks and DFIs are misconstruing instructions issued by central bank.

The SBP made it clear that the spread over KIBOR once fixed at the outset of the transactions, could not be changed.

The SBP denied that the instructions containing in the circular issued earlier were applicable to the consumer lending products only, which was not the correct interpretation.

“It has been further observed that some of the banks and DFIs are not strictly following the instructions that the margin or spread over KIBOR (Karachi Inter-Bank Offered rate) fixed at the outset of the transactions cannot be increased by banks or DFIs during the tenure of the lending product,” said a SBP circular issued on Thursday.

“This practice has been viewed very seriously,” said the SBP.

Banks and DFIs were reminded that the instructions issued earlier through a circular were applicable to all types of lending products, including running finance and working capital loans.

“It is re-emphasised that the margin or spread over KIBOR once fixed at the outset of the transactions should not be increased by the banks or DFIs during the tenure of the lending product,” said the SBP.

The issue could be more serious as the banks found it difficult to continue with the charges (rate) it signed with the customers earlier, especially in the wake of 2 per cent increase in the benchmark interest rate, 25 per cent inflation, 25 per cent devaluation of local currency and rising cost of banking in the country.

The liquidity crunch put pressure on banks to mobilise deposits at much higher rates to above 16 per cent.

“It’s a violation of banking rules to increase the interest rate fixed at the time of agreement but the mounting pressure on banks through increased benchmark rate and inflation has compelled them to do it,” said a senior banker.

It was also observed that the banks, which are in dire need of liquidity, might approach to break agreements that involve large credit. It may help them to secure credit and lend it at the desired rates.

The SBP says that it will, during the course of on-site inspection, particularly check the compliance of the above instructions and necessary action against the delinquent banks and DFIs will be taken under the relevant provisions of the Banking Companies Ordinance.