The cash-strapped government seems to have sucked up all of the liquidity available with banks, which are nowadays showing unusual restraint in investing in risk-free government securities.
Instead, Friday saw the central bank injecting Rs 460 billion in the apparently liquidity-scarce banking system. The latest billions pumped into banking might be a half-hearted move by the State Bank of Pakistan (SBP), as Governor Yasin Anwar had cautioned against such injections in his last monetary policy statement.
The banks submitted 38 bids to the central bank to partially offload their government papers’ stocks, demanding an annual rate of return ranging between 8.81 and 9.05 percent. However, the SBP, acting on behalf of the Finance Ministry, accepted 33 of the total bids to inject Rs 460 billion at 8.86 percent through conducting reverse repo operation of seven days maturities. If results of the outgoing week’s open market operation (OMO) and T-bill auction conducted by the SBP on February 19 and 20 respectively are the criteria, one can aptly surmise that the banks are either facing an acute liquidity crunch or they are more cautious in their transactional dealings with a relatively more critical regulator. On February 19, the central bank tried to mop up some cash from the banking system for three days but the banks did not submit even a single bid. This made senior analysts like Asfar Bin Shahid believe that the profit-conscious banks were avoiding blocking their funds for three days and were losing out in bidding for treasury bills scheduled on the very next day – February 20.
Interestingly, the banks also remained off the mark in Wednesday’s auction and offered bids worth Rs 99.442 billion only. The amount offered was Rs 76 billion less than SBP’s Rs 175 billion quarterly target.
The bids submitted in February 20 auction depict that the risk-averse banks are reluctant to make long-term investment as they offered only Rs 240 million to purchase T-bills of 12 months maturity. Their hot pick were the three-month securities against which their offer amounted to Rs 91.152 billion. The six-month maturities could also not manage to attract Rs 8 billion. The SBP, however, accepted bids of Rs 90.842 billion at a cut-off yield of 9.27, 9.36 and 9.39 percent for 3-, 6- and 12-month maturities.
The State Bank has no idea why the banks have all of a sudden started under-participating in the heavily yielding government auctions that have set their balance sheets in the green zone over past couple of years. “We have no idea. You better ask the banks why they did so,” SBP’s chief spokesman Syed Wasimuddin told Pakistan Today when approached for his views on Tuesday’s OMO that had failed to attract a single bid. However, independent observers had much to share with this scribe.
“They bid Rs 99 billion because lending to the state is no more profitable for the banks,” said Asfar Bin Shahid. Referring to SBP figures, Shahid said that during July-December FY13, the banks’ credit to the private sector had grown by Rs 154 billion. “The banks have now realised that financing to the private sector would fetch them 12.5 to 13 percent mark up as compared to investing in the government securities at a reduced interest rate,” he explained.
Asked if the central bank, through cutting discount rate to a single digit of 9.5 percent, had finally brought the banks back on track, AB Shahid replied in affirmative. However he added that the banks were still risk averse given the prevailing uncertainties on political and law and order fronts, which were adversely affecting the volume of their bad debts.
“They (banks) still are very selective in terms of financing and are focusing on risk-free and growing sectors like food, fertiliser, pesticides etc,” the analyst said.
He wondered what made the central bank pump Rs 460 billion into the banking system (on Friday), while the banks on Wednesday had lent it over Rs 91 billion. “The SBP might have done it to provide the banks with money to clear their financial obligations against Wednesday’s auction,” Shahid opined. It means, he said, the banks were facing an acute liquidity shortage. The SBP’s chief spokesman’s previous statements that the regulator only conducts injection operation when there is liquidity crunch in the money market put enough weight behind Shahid’s analysis.
If results of the outgoing week’s open market operation (OMO) and T-bill auction conducted by the SBP on Feb 19 and 20 respectively are the criteria, one can aptly surmise that the banks are either facing an acute liquidity crunch or they are more cautious in their transactional dealings with a relatively more critical regulator
