Commercial banks are adversely impacting smooth functioning of interest rate corridor by holding billions of rupees excess reserves in cash. According to central bank data, the banks, which are currently pocketing handsome amounts through investing massively in the risk-free government securities, held Excess Cash Reserves (ECRs) worth over Rs41.17 billion during the week ranging from 25th November to 1st December 2011. ECRs are an amount that banks posses over and above minimum required Cash Reserve Requirement (CRR). A breakup shows that during the week under review conventional banks’ cumulative excess cash accounted for Rs24.591 billion while that of the Islamic banks amounted to Rs16.579 billion. SBP figures reveal that while conventional banks were, collectively, raising in excess cash of Rs3.513 billion on daily average basis their competitors in Islamic banks were reserving the same to the tune of Rs2.368 billion.
A weekly review of banks total ECRs show that they held Rs797 million on November 25, Rs797 million on November 26, Rs797 million on November 27, Rs2.766 billion on November 28, Rs9.063 billion on November 29, Rs13.789 billion on November 30 and Rs13.160 billion on December 1 of the current year. These amounts also include pre-mature encashment that banks reported to the central bank in line with BSD circular No 09 issued by SBP in July 2006.
Alarmed by banks’ increasing ECRs, State Bank reported that banks’ practice to reserve excess liquidity was putting adverse affect on smooth functioning of interest rate corridor, currently standing at 12 per cent. “Excess cash reserve not only adversely impacts smooth functioning of the interest rate corridor,” SBP said. State Bank said additional ECRs had also “implications” for the banks’ own liquidity management. Sensing urgency of the situation, the regulator has decided to make public on weekly basis the banks’ possession of liquidity that is in excess of CRR.
“In order to bring more efficiency in the money market operations of banks, State Bank of Pakistan has decided to publish weekly data of Excess Cash Reserves maintained by commercial banks over and above the minimum required Cash Reserve Requirement,” State Bank said in a press communiqué issued on Friday. State bank is concerned over the country’s growth prospects as the risk-averse banks are extending extensive loans to the funds-starved central and provincial governments instead of lending to the growth-oriented private sector.
Government’s excessive budgetary borrowing from banks, which stood above Rs700 billion during July-Oct FY12, have increased assets of the latter to Rs7.7 trillion during Jan-June 2011. On the other hand, banks’ advances to the private sector, considered worldwide as the engine of growth, are negligible and according to central bank are “muted” so far.