January 23, 2003	Thursday	Ziqa’ad 19, 1423

KARACHI, Jan 22: The government borrowed Rs28.5 billion from the banking system on Wednesday at very cheap rates as the banks wallowing in excess liquidity were desperate to lend. But this borrowing does not mean the government has changed its policy of retiring bank credit on net basis: it rather shows the government is rolling over some short-term debts secured earlier through T- bills. The significance of the borrowing is in the lower interest rates and not in the borrowing itself.

The State Bank received Rs83 billion plus bids for the three -month and one-year treasury bills against the borrowing target of Rs30 billion. Of this the SBP accepted Rs28.5 billion worth of bids and rejected the rest. Since the bids were too many and too large the pricing was quite low: the SBP paid a maximum yield of 3.41 per cent on three-month bills down from 3.90 per cent a month earlier and 3.69 per cent on one-year bills down from 4.44 per cent. The central bank sold Rs1.6 billion worth of three- month bills and 26.9 billion worth of one-year bills at the said rates.

Central bankers say this sharp fall in the T-bills yield show that the banks have failed to increase lending in more profitable areas with acceptable levels of risks. It was not for the first time that the banks made a beeline for buying T-bills.

They started putting in most of their surplus liquidity during the last fiscal year that saw private sector credit falling to Rs30 billion against the targeted Rs98 billion. During this fiscal year also they have been making huge investment in T-bills despite the fact that private sector credit has started picking up. In July-December 2002 banks had disbursed Rs68 billion credit to the private sector but senior bankers say the figure may not touch the target level of Rs94 billion at the year-end in June.

Businessmen say the reason why the banks have failed to lend more to the private sector is the fact that they have not made enough reduction in their lending rates. They also say that the banks have failed in revamping their credit disbursement procedures and clear them of big irritants. Says a former vice chairman of All Pakistan Textile Mills Association Mushtaq A. Vohra: “Some banks still refuse to lend if the name of one of the companies of the borrower group is on the CIB (credit information bureau) list”.

“This is not fair as the SBP has clarified it that borrowers cannot be turned down for the mere reason that their names are there on the CIB list.” Central bankers also endorse this view.

“Not only the banks have failed in responding to the changes in monetary policy but they have also not revamped their credit policies in line with the changing scenario,” said a central banker who refused to be identified. All banks combined lowered their weighted average lending rate from 12.08 per cent in July last to 10.66 per cent in November. Data on December 2002 is not available but bankers claim they have made enough slashing in their lending rates but they admit that the slashing has been made in case to case basis rather than across-the-board. “We have to weigh the risks involved in credit disbursement. All borrowers cannot qualify for a certain markup structure,” commented head of credit of a large local bank.

Bankers say a key reason for the banking system flushed with liquidity is that the inflow of foreign exchange has been on the increase. When the country receives more of foreign exchange its rupee equivalent does flow into the system raising the overall liquidity. They say another factor responsible for high liquidity is that currency in circulation has started to shrink. And some banks particularly the big ones are witnessing seasonal credit retirements a bit ahead of schedule. As against this the demand for private sector credit is not likely to rise dramatically as the corporates have started relying on TFCs and internal cash flows.

“That is why banks tend to invest surplus liquidity in TBs,” said a senior banker. He admitted that part of the Rs83 billion plus bids received in Wednesday auction was speculative in the sense that the banks had come up with the bids without having actual liquidity on the back.

“But they did this to hedge their future cashflows foreseeing a further fall in TBs rates.