Despite repeated warnings from the State Bank, the commercial banks keep putting to risk the country’s interest rate corridor by reserving billions of rupees of cash in excess of the mandatory Cash Reserves Requirement (CRR).
According to State Bank data, the commercial banks cumulatively held Excess Cash Reserves (ECR) of over Rs 68 billion during the week ranging from September 28 and October 04. A break-up shows that the conventional banks possessed Rs 51.383 billion while their counterparts in Shariah-compliant banks held Rs 17.221 billion during week under review.
On average, the banks’ daily reserves were calculated at Rs 9.80 billion, Rs 7.34 billion by conventional and Rs 2.46 billion by the Islamic banks. This holding of surplus billions by the otherwise liquidity-scarce banks makes the analysts wonder that if the banks are able to maintain such big amounts in addition to the compulsory what they are required by the regulator, why the State Bank is injecting billion into the banking system to avoid a purported liquidity crunch.
Some analysts tend to perceive that the weekly pumping of billions by the central bank is a sort of indirect budgetary lending to the cash-strapped government that borrows the injected sums from the scheduled banks thorough auctioning its risk-free securities, like Treasury Bills, Pakistan Investment Bonds and Ijara Sukuk. The central bank figures reveal that during a short span of one month, October 4 to September 1, the regulator pumped liquidity into the money market to the tune of over Rs 3 trillion in eight different reverse repo open market operations (OMOs).
The State Bank injected Rs 487 billion on Oct 4, Rs 99.5 billion in two OMOs on Oct 8, Rs 603 billion on Oct 11, Rs 527 billion on Oct 18, Rs 146 billion on Oct 22, Rs 641 billion on Oct 29 and Rs 521 billion on November 1. The State Bank, perhaps, itself may not recall when it had last conducted its Mop Up operation. The regulator, however, has been cautiously monitoring and publishing the banks’ holding of ECR to deter the banks, though unsuccessfully.
It was in December last year when the central bank had warned the banks against holding ECR that, according to the regulator, adversely impacts smooth functioning of the interest rate corridor.
The State Bank since December 2011 is publishing the banks’ ECR data on weekly basis perhaps to shame the later on disturbing the interest rate corridor by “hoarding” the direly needed additional money. As if this was not enough, the regulator on Friday last moved again and notified the banks that it, from now onward, would make public bank-wise data of the ECR.
“The SBP expects that dissemination of this data will bring more transparency and efficiency in the domestic money market,” said the State Bank.
The bank-wise data on ECR reveals that all major public and private and local and foreign commercial and Islamic banks hold excess money to the disadvantage of interest rate corridor. The United Bank Limited (UBL) tops the list of the conventional banks by maintaining on average ECR worth Rs 465 million every day. On the Shariah-compliant banking front, the Islamic Bank Branch (IBB) of the Bank Al-Falah secured the top slot by reserving Rs 386 million on average per day.
Other conventional banks to follow, according to SBP data, are Habib Bank, Barclays Bank, MCB Bank, National Bank of Pakistan, Habib Metropolitan Bank, Bank Al-Falah, Standar Chartered Bank, Faysal Bank, Allied Bank, First Women Bank, Bank of Punjab, Samba Bank and Bank Al-Habib. The daily average ECR of these banks during September, respectively, were recorded at Rs 455 million, Rs 383 million, Rs 319 million, Rs 311 million, Rs 254 million, Rs 254 million, Rs 215 million, Rs 170 million, Rs 163 million, Rs 126 million, Rs 116 million, Rs 109 million and Rs 108 million.
The Islamic banks are no exception with Meezan Bank possessing Rs 267 million, Dubai Islamic Bank Rs 264 million, Standard Chartered Bank Rs 146 million and Albaraka Islami having reserved Rs 106 million during the said month. These are the banks with daily average excess balance of over Rs 100 million. The central bank on Friday said it had “now” decided to publish bank-wise data on ECR maintained by the banks “over and above” the minimum required CRR.
“Excess cash reserve not only adversely impacts smooth functioning of the interest rate corridor but also has implications on banks’ own liquidity management,” the bank warned. To be disclosed with a lag of one month, the SBP said, the data would help in differentiating between the relative performances of various banks in their money market operations.
