Commercial banks held over Rs70 billion of excess cash reserves during the week spanning between 23rd and 29th December; thus adversely impacting smooth functioning of the interest rate corridor.
POCKETING HANDSOME AMOUNTS
Central bank reported Friday that banks, presently pocketing handsome amounts through investing massively in the risk-free government securities, possessed Excess Cash Reserves (ECRs) worth over Rs70.464 billion during the said week.
MASSIVE NUMBERS
A breakup shows that during the week under review conventional banks’ cumulative excess cash accounted for Rs41.023 billion, while that of the Islamic banks amounted to Rs29.442 billion. SBP figures reveal that while conventional banks were, collectively, raising an excess cash of Rs5.860 billion on daily average basis their competitors in the Islamic banks were reserving the same to the tune of Rs4.206 billion.
A weekly review of the banks’ total ECRs show that the banks held Rs21.278 billion on December 23rd, Rs21.278 billion on December 24th, Rs21.278 billion on December 25, negative Rs10.552 billion on December 26th, Rs4.995 billion on December 27th, negative Rs5.409 billion on December 28th and Rs17.596 billion on December 29th of the last year.
These amounts also include the pre-mature encashment that banks reported to central bank in line with BSD circular No. 09 issued by SBP in July 2006.
IMPLICATIONS
Alarmed by the banks’ increasing ECRs, central bank believes that banks’ practice to reserve excess liquidity was putting adverse affect on the smooth functioning of the interest rate corridor.
“Excess cash reserve not only adversely impacts smooth functioning of the interest rate corridor,” said SBP in a previous statement. State Bank said additional ECRs had “implications” for the banks’ own liquidity management.
WEEKLY PUBLICATION
The regulator has decided to make public on weekly basis the banks’ possession of the 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 December to publish the weekly data of Excess Cash Reserves maintained by commercial banks over and above the minimum required Cash Reserve Requirement,” the bank said.
APPREHENSIONS
Regulators in State Bank are 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. ECR is an amount that the banks posses over and above the minimum required Cash Reserve Requirement (CRR).
