September 28, 2002	Saturday	Rajab 20, 1423

KARACHI, Sept 27: Many local and foreign banks had to borrow Rs25 billion overnight funds from the State Bank on Friday primarily to average out their mandatory cash reserves. But some bankers said they could not rule out the possibility of election -related unusually high withdrawals from the banks that might have intensified the ongoing liquidity crisis in the inter-bank market. The elections are due on October 10.

Sources close to the SBP said eight leading local and foreign banks resorted to a combined discounting of Rs22 billion.

The others borrowed Rs3 billion from the SBP discount window against the approved government securities.

The banks that borrowed between Rs1 billion and Rs5 billion overnight funds through the SBP discount window included (i) National Bank (ii) Habib Bank (iii) Union Bank (iv) Standard Chartered (v) United Bank (vi) Askari Bank (vii) Allied Bank and (viii) PICIC Commercial Bank. Bankers said some other banks also resorted to a combined discounting of Rs3 billion but their names could not be learnt.

Some of these banks have very large branch networks and it is not easier for them to tell off hand whether the cash crisis they are in is because of their over-investment in treasury bills last week or some unusual withdrawals have also started taking place.

Bankers say they normally witness some large withdrawals prior to elections adding that the amount so withdrawn flows back into the system after some time.

“The discounting was seemingly meant for reserve averaging,” said treasurer of a local bank but he said he would not rule out the possibility of some unusual withdrawals from the banking system.

Banks are supposed to keep 5 per cent of their deposits as mandatory cash reserves on weekly basis. But they are allowed to let the reserves fall to 4 per cent on any given day and cover the shortfall by Friday. This making up of the shortage in cash reserve is called reserve averaging. Normally the banks borrow overnight funds from the SBP against approved securities to fill in the gap in the reserves.

But what makes Friday discounting of Rs25 billion something unusual is that this has brought the total discounting the banks have done in just four days to more than Rs45 billion. “This is really an awesome amount,” admits treasurer of a foreign bank but he does not see any reason other than reserve averaging for this.

“I do not think banks went for huge discounting due to any unusual withdrawals that left them poorer. It was just reserve averaging.” But sources in local banks said it would be premature to say whether the liquidity crisis that forced the banks to go for a big discounting had an element of unusual withdrawals or not. “Apparently it is just reserve averaging. But it is possible that some banks somewhere may be experiencing a pressure on their deposits,” one of them said.

“I would not be surprised to learn that a couple of billions of rupees have gone out of system because withdrawals on the eve of elections are quite common,” said treasurer of a private bank.

But he quickly added: “Such withdrawals are gradual and their volume never exceeds a few billions of rupees. So I think that the Rs25 billion discounting is primarily aimed at what we call reserve averaging.”

Banks found themselves trapped in a serious liquidity crisis this week after making over-investment in treasury bills last week—much to the chagrin of the State Bank that has warned them time and again not to do so.

“They are paying the price now,” said a source close to SBP commenting on the liquidity crisis the banks are facing and their need to borrow overnight funds from the SBP discount window at 9 per cent.