KARACHI, Feb 1: The investment banks and development financial institutions (DFIs) can now borrow money for up to three days from the State Bank of Pakistan. Till now this facility was available to commercial banks only. Central bankers say the decision should help investment banks and DFIs overcome their liquidity problems.

An SBP circular, received by bankers on Friday, said investment banks and DFIs could enter into three-day repo with the SBP on “the same terms and conditions” that apply on commercial banks.

The permission means that investment banks and DFIs can now borrow money from the central bank for up to three days against treasury bills and other approved government securities. “This would surely help investment banks and DFIs in a big way,” said treasurer of Pak-Kuwait Investment Company, Mohammad Ali Qureshi.

“If sometime something goes wrong they can turn to the lender of the last resort for help.”

Late last month the central bank cut the repo rate from 10 to 9 per cent to boost investment and inflate sagging economy. The permission given to investment banks and DFIs would supplement this move.

Currently, the inter-bank money market is wallowing in excess liquidity with overnight call rate floored to 1-2 per cent. But many of investment banks and DFIs are not that liquid. “So only those investment banks and DFIs that are short of liquidity will be the immediate beneficiary,” said chief executive of Al-Meezan Investment Bank, Irfan Siddiqui.

Some executives of investment banks and DFIs, interviewed over telephone by Dawn, were not quite clear on whether they could enter into repo with commercial banks. But a SBP spokesman told Dawn they were. He said the central bank had restricted repo transactions of investment banks and DFIs between themselves in June 1996, but in November 1999 it allowed them to do repos also with commercial banks.

Bankers said the decision allowing investment banks and DFIs to enter into three-day repo was good for the inter-bank market. “It will ease off liquidity pressure from the inter-bank market to the extent to which investment banks and DFIs used to borrow from banks,” said Financial Market Association Secretary S. Mumtaz Yousuf. Repo rates vary in the inter-bank depending upon the liquidity levels, but normally the market rate is higher than that of SBP. So investment banks and DFIs would naturally enter into repo with the central bank rather than from the inter-bank market.

“This would also encourage them to invest in treasury bills and other government securities,” said treasurer of a leading foreign bank. This means the government will have more buyers of its security papers in the inter-bank market than in the past.

“That should give the government more leverage in pricing T-bills and other debt-raising instruments,” said another banker.

Since long-term lending has come to a halt after BEL having been taken over by the SBP and NDFC having been merged with state-run National Bank the repo facility allowed to DFIs would let those still struggling to survive to keep floating. But it does not mean they can escape what is in store for them: heavy restructuring on the insistence of the IMF.

Currently, 16 investment banks and eight DFIs are in operation.