KARACHI, Oct 12: The State Bank has decided to hold separate auctions for six-month treasury bills to leave little room for the banks to make unrealistically large bids.

The Exchange & Debt Management Department of the central bank has notified this decision through a circular.

The circular says that the auction of the treasury bills “will continue to be conducted on alternative Wednesdays.” But six-month bills “will be offered in one auction” and the bills of other maturities will be offered in the other.

This means that whereas six-month bills will be offered in one auction the three-month and one-year bills will be offered in the other.

Senior bankers said the SBP decision is aimed at discouraging banks from offering unrealistically large bids. “This practice took a heavy toll on the liquidity levels in the past few weeks,” said a banker close to SBP. Since the banks came up with much larger bids for the bills than the actual level of liquidity available with them in the past few auctions the central bank was forced to mop up more than the targeted amount of surplus funds. That deepened the ongoing liquidity crunch triggered by outflows due to withdrawal of deposits by state-run corporations; pre-poll withdrawals and tax and Hajj-related payments by the bank clients.

The liquidity crisis was so acute until last week that banks had to borrow Rs12-15 billion daily from SBP discount window at 9 per cent. It was against this backdrop that two senior officials of the State Bank had convened a meeting of the treasurers of all the seven primary dealers to resolve this issue.

At the meeting held last week the primary dealers or the banks selected by the SBP to sell government securities had suggested to the central bank that auctions of six-month T-bills should be held separately. They had taken the position that the reason why the banks were making much larger bids than the actual liquidity available with them was that the SBP was offering T-bills of all the three tenures at the same time. Since the banks were not sure about the tenure of the bills that the SBP was really interested in selling they were submitting three bids — one each for three-month; six-month and one-year bills — instead of one bid. This was showing the total bids three times larger than what they actually were.

Bankers close to SBP say this faulty bid pattern was not only forcing the central bank to suck in more than targetted liquidity from the market but was also depleting the stock of the treasury bills.

Bankers say that the decision to hold separate auctions of six-month treasury bills should help remove the said distortion in the bidding pattern and eliminate speculations. This should also help the SBP maintain a certain stock of treasury bills necessary to regulate the market in line with the credit plan requirements. “Above all the decision should end speculations on interest rate cuts,” said a foreign bank treasurer.