January 9, 2003	Thursday	Ziqa’ad 5, 1423

KARACHI, Jan 8: Banks foresee that under the present situation increasing lending is too difficult and all they can do is to keep investing surplus liquidity in the treasury bills come what may.

This approach of the banks came to the fore when they made a beeline on Wednesday to buy six-month T bills at very low prices.

The State Bank had to lower the cut-off yield on six-month bills by 46 basis points to 3.94 per cent to sell Rs33.8 billion worth of six-month bills: it had set the sale target at Rs 32 billion before the auction but the banks came up with Rs 60.2 billion worth of bids. The bids were priced too low in an air of competition and when the SBP sold Rs 33.8 billion bills the cut- off naturally fell to 3.94 per cent from the earlier mark of 4.40 per cent.

The central bank scrapped the remaining bids—and its decision proved to be based on real assessment of the situation as immediately after the auction the banks did borrow Rs 12.2 billion from it. This borrowing was made through its discount window at a fixed rate of 7.5 per cent.

What does it show? “It shows that the banks have really failed to find new venues of lending and as such they have no option but to keep investing in treasury bills,” said a source close to SBP.

“The lowering of the T-bills cut-off should not be seen as a signal from SBP,” he said insisting that “it came natural all the way because of heavy bidding by banks.”

A bank treasurer said banks foresee high level of liquidity to persist in the coming days and so they are hedging their future cashflows by investing the current amount of liquidity in the T- bills. On Thursday alone Rs 39 billion inflow is expected in the market through maturity of previously sold treasury bills etc.

Besides, the SBP continues to buy dollars from the inter-bank market thereby injecting more of rupee liquidity into the system.

Moreover, a huge chunk of the money withdrawn from the banks during Ramazan is yet to come back to the system, said another treasurer. “See this in the backdrop of the falling credit demand from the private sector and you will get a fair idea of why we want to keep investing in T-bills.”

Private sector credit has started picking up but the pace is too low to absorb the available in the system for a couple of reasons. (The government sector is also retiring bank credit instead of making fresh borrowing).

The first of them all is that most of the companies are now actively involved in what they call internal fund management. But for many it is nothing short of using the black money they had kept abroad after whitening them through home remittances. Secondly corporates have also started relying on term finance certificates to raise money from the debt market. Last but not the least a lower than expected growth in large scale manufacturing has also limited the private sector demand for credit from the banks. If anything could be added to this list is the fact that sugarcane crushing has still not started fully thereby delaying another chance of some pickup in the private sector borrowing from banks.