If participation in the central bank’s open market operations, ranging from mop-up to injection activities, is any criteria the regulator and the commercial banks seem to be playing cat and mouse over huge profits the latter seem to have addicted to through investing billions in the risk-free government securities.
Tuesday saw the profit-conscious banks giving a cold shoulder to the State Bank of Pakistan’s (SBP) open market operation under which the regulator wanted to mop up liquidity from the banking system through selling out t-bill of three-day maturity. The State Bank received zero bids from the banks.The lack of interest the banks showed Tuesday is because of, what the banking analysts said, their cautious attitude towards using the SBP’s interest rate corridor that is nowadays under a strong vigil of the regulator. “The SBP now notes the banks which either place or borrow funds from it,” Asfar Bin Shahid told Pakistan Today.
The economist said the SBP was now closely watching the banks which were using its interest rate corridor more frequently. The regulator has recently allowed the banks to place or withdraw their surplus liquidity in its interest rate corridor not more than seven times in a fiscal quarter, inclusive of both placements and withdrawals.
In its last monetary policy decision the central bank capped its interest rate corridor at 7 percent increasing it from 6.5 percent. The bank also put a 9.5 percent ceiling to the corridor. The measure, as a banker put it, is aimed at some tightening to reduce the widening monetary gaps. Another reason for the banks’ lukewarm response to SBP’s auction on Tuesday the analysts said was the former’s desire for maximum returns on the government papers that the inflation-conscious regulator has slashed significantly in recent months through cutting the discount rate at least by 2.5 percent to 9.5 percent from 12 percent.
Further, the analyst said, the profit-crazy banks did not show interest in the mop-up auction because it was conducted at the open market rates currently ranging between 4 and 4.5 percent.
“Tomorrow (today) SBP would call bids for T-bills so the banks did not want to block their funds for three days and lose out on bidding,” said AB Shahid. The State Bank, as per its quarterly auction calendar, would hold its 4th auction of this quarter Wednesday (today) to sell T-bills worth Rs 175 billion with maturity amount standing at Rs 141.313 billion.
A banker also seconded this view saying the banks were desperately looking for windows where they could park their liquidity. On the other hand, the banker said, the central bank was going stricter in terms of returns on the government securities. “The State Bank rejected the last two bids for T-bills and PIBs owing to the above-than-normal rates (quoted by the banks),” said the banker, requesting not to be named.According to the banker, the state bank also seemed determined to reduce the volume of liquidity it has been pumping into the banking system in recent months. “This would be a daunting task (for SBP) given the ever-widening (monetary) deficits and the resultant government’s reliance on budgetary bank credits,” he added. The banker said the banks’ participation in Wednesday’s auction would be huge as each of the big five banks have been quoting heavy maturities of more than Rs 50 billion.
