Oh the horror! (Part II)


Banks haunting interest rate corridor by holding over Rs70bn excess cash
The central bank’s concern for ensuring a smooth functioning of the country’s interest rate corridor seems far from being allied as the banks, both conventional and Islamic, continue to maintain huge reserves of excess liquidity that by the start of this month accumulated to over Rs 70 billion.
The State Bank of Pakistan (SBP) has warned that the banks, by sitting on significant Excess Cash Reserves (ECR), adversely affect the interest rate corridor in the country’s banking system. “Excess cash reserve also has implications for the banks’ own liquidity management,” observed the regulator in a statement.
However, the central bank’s alert seems to have fallen on deaf ears in the banking circles where, according to the SBP data, the banks are holding billions of excess cash aggregating to Rs 70.490 billion during the week that ended on July 5.
A breakup for the week under review depicts that the conventional banks’ cumulative cash holdings amounted to Rs 52.412 billion while that of the Shariah-compliant Islamic banks stood at Rs 18.079 billion.
During the week, from June 29 to July 05, the State Bank counted the conventional and Islamic banks’ daily average excess cash collection at Rs 10.070 billion, the former holding Rs 7.487 billion and the latter Rs 2.583 billion.
A day-to-day account of ECR showed that the banks possessed additional cash worth Rs 36.776 billion on June 29, Rs 20.426 billion on June 30, July 01 and July 02, negative Rs 12.753 billion on July 03, negative Rs 4.347 billion on July 04 and negative Rs 10.464 billion on July 05.
Whereas the well-performing Sharia banks were able to keep their excess reserves mostly in the green zone, except for July 04, their counterparts in conventional banks saw three negative figures on their balance sheets during the week.
The above amount is inclusive of the pre-mature encashment the banks reported to the central bank in line with the notification issued by the latter in July 2006. Sensing its adverse impact on the interest rate corridor, the central bank has started making public, on weekly basis, the banks’ liquidity that they possess in addition to their Cash Reserve Requirement (CRR).
“To bring more efficiency in the money market operations of banks, the State Bank of Pakistan has decided to publish the weekly data of Excess Cash Reserves maintained by commercial banks over and above the minimum required CRR,” said an SBP circular. The ECRs is an amount that the banks posses over and above the minimum required CRR.