November 14, 2002	Thursday	Ramazan 8, 1423

KARACHI, Nov 13: The State Bank on Wednesday left the banking system with enough liquidity to enable them to offer liberal credit to the private sector and to finance the ongoing pre-Eid withdrawals. The central bank mopped up only Rs20.9 billion from the system by selling six-month treasury bills against the target of Rs30 billion.

Senior bankers said the SBP received Rs38.6 billion worth of bids of which it accepted Rs20.9 billion and rejected the rest.

They said the SBP mopped up lesser than the targeted amount of liquidity to keep the market liquid ahead of the auction of long-term bonds later this month. An official of the central bank admitted this and added that another reason for leaving the banks with some liquidity was to ensure that there is no cash shortage amidst pre-Eid withdrawals. Individuals as well as corporates and government sector organisations make heavy withdrawals in Ramazan to finance pre-Eid purchases. The money eventually returns to the system—but only after a couple of weeks.

Treasurers of some banks said that the State Bank sold lesser than the targeted amount of T-bills because had it stuck to the target it would have to slightly increase the yield on the TBs.

The SBP kept the cut-off yield unchanged at the previous level of 6.37 per cent. “Had it tried to meet the sale target of Rs30 billion the cut-off would have risen to 6.39 per cent,” one of the treasurers said. Another treasurer said the reason why the State Bank did not stick to the sale target of treasury bills was that its stocks of the bills were running short. But a SBP official who refused to go on record denied this. “This is not the case,” he said.

“By leaving enough liquidity in the system we have signalled to the market that the interest rate is not going to move up. That is so clear and obvious,” he remarked. But he would not comment on whether the SBP would further ease off its monetary policy.

“Besides it is time for a big pickup in seasonal credit. So the banks should remain liquid to offer liberal credit to the private sector.

A local banker said the SBP had left enough liquidity in the market because the inflow due on November 28 through maturity of treasury bills is too low—Rs2.5 billion. He said since the SBP would auction one-year T-bills on that day and possibly the sale target of one-year bills would be larger that is why the SBP had left some liquidity in the banking system.

“Whatever may be the reason...dishonouring the auction target is not good for the market,” said treasurer of a bank. “Banks do the bidding keeping in view the auction target...and as the SBP dishonours the target their plans are gone.”

The banker estimated that the market was surplus by at least Rs10 billion on Wednesday with the result that the inter-bank lending rates had crashed. “When the market opened one-week rate was 7 per cent but after the announcement of the auction result it came down to 3.75 per cent,” he said adding that the new rates were effective for Thursday when the settlement of the auction would take place. Another banker said that the interest rate on two-week funds fell from 6.5 per cent to 4.5 per cent adding that large banks with enough surplus liquidity would be net losers.

Heads of banks say instability in inter-bank lending rates (resulting from dishonouring of T-bills auctions or otherwise) make it difficult for them to restructure the lending rates for the customers in line with the changes in the monetary policy.

“If the SBP want us to respond quickly to the changes in the monetary policy it must avoid instability in the inter-bank lending rates,” remarked head of a local bank.