KARACHI, Feb 25: The State Bank has allowed the banks to hold 20 per cent of their time and demand liabilities abroad instead of 15 per cent, according to a circular issued on the last working day before Eid.

In other words the banks are now supposed to keep 80 per cent instead of 85 per cent of the specified assets within the country.

The circular (BSD No. 10) says the decision is effective from March 2, 2002. It says that the relaxation given to the banks will create more space for them to take advantage of the removal of the Nostro limits. The central bank recently removed the Nostro limits—or the limits on balances held abroad—on the demand of the IMF to enable banks to do more business in foreign exchange.

Now by permitting banks to hold abroad 20 per cent of specified assets—instead of 15 percent—the SBP has encouraged banks to employ more of their funds abroad for profit earning. Top bankers say the permission has come as part of an ongoing liberalization of foreign exchange rules that has been in progress on the demand of the IMF.

Earlier this year, the central bank lifted all restrictions on the release of foreign exchange by the banks to people travelling out of the country. Last week the State Bank also allowed private shipping companies to make outward payments in foreign exchange.

Central bankers say what has provided cushion for taking such bold decisions is a rapid increase in foreign exchange reserves that are now well over $5 billion—enough to finance six-months import bill.

The SBP had restricted the banks in May 1999 to hold only 15 per cent of their specified assets abroad to check capital flight.