Commercial banks have got their Excess Cash Reserves (ECRs) down by a massive 70 per cent or Rs49.324 billion, ostensibly due to a stricter stance on the part of regulators from the central bank. Excess liquidity of the banks contracted to Rs21.140 billion during the week that ended on January 12 from Rs70.464 billion they possessed during the week ranging from December 23 to December 29.
The central bank warns that excess cash holdings by commercial and Islamic banks, which are pocketing handsome amounts through investing massively in the risk-free and heavily-weighted government securities like MTBs, Pakistan Investment Bonds and Ijara Sukuk, adversely impacts smooth functioning of the country’s existing interest rate corridor.
A breakup, reported by SBP, shows that during the week under review cumulative excess cash of the conventional and Shariah-compliant banks decreased to Rs17.002 billion and Rs4.137 billion, respectively.
This depicts a slump of 58.5 per cent and 86 per cent in the ECRs of the conventional and Islamic banks when compared to the previous week that saw these banks holding Rs41.023 and Rs29.442 billion, respectively.
State Bank reported that while conventional banks’ collection, on daily average basis, of excess cash came down from Rs5.860 billion to Rs2.429 billion that of their competitors in Islamic banks shrank phenomenally to Rs591 million from the previous Rs4.206 billion. During the week under review, banks raised additional liquidity to the tune of negative Rs11.241 billion on January 6, 7 and 8, negative Rs7.762 billion on January 9, Rs22.656 billion on January 10, 16.521 billion on January 11 and Rs23.447 billion on January 12. These amounts also include pre-mature encashment that the banks reported to central bank in line with BSD circular no 09 issued by SBP in July 2006.
Cautioned by banks’ increasing ECRs, central bank believes that the banks, by sitting on huge excess liquidity reserves, were putting adverse impact on the interest rate corridor in the banking system. “Excess cash reserve not only adversely impacts smooth functioning of the interest rate corridor but it also has implications for the banks’ own liquidity management,” said SBP in a previous statement. The regulator has, therefore, decided to make public on weekly basis the banks’ possession of liquidity that is in excess of the Cash Reserve Requirement (CRR). “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 CRR,” the bank said. State Bank is also 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. ECRs is an amount that the banks posses over and above the minimum required CRR.
