KARACHI, April 16: The yield on one-year treasury bills fell slightly on Wednesday as the State Bank sold Rs24.4 billion worth of these bills to mop up Rs23.8 billion from a fairly liquid market.
The SBP had to lower the cut-off yield on one-year bills by six basis points to 2.69 per cent to accept Rs24.4 billion bids out of total Rs40.1 billion received in Wednesday’s auction.
The central bank had set a combined sale target of Rs24 billion for one-year and three-month treasury bills but since the central bank had mopped up enough money through one-year bills it accepted only Rs500 million bids for three-month paper out of a total of Rs22.6 billion. The cut-off yield on three-month bills came to 1.65 per cent.
The SBP said banks came up with total bids for one-year and three-month bills worth Rs62.7 billion of which it accepted bids worth Rs24.9 billion draining out Rs24.3 billion from the market.
The SBP has been consistent in its policy of allowing the T-bills yield to fall on the back of excess liquidity in the market. The main objective is to push banks to make more lending in the private sector at cheaper rates. At the start of this fiscal year in July 2002 the weighted average yield on one-year bills stood at 6.81 per cent that has now come down to 2.60 per cent showing a decline of 4.21 per cent. The central bank has also allowed more than four per cent fall in the weighted average yield on six-month bills at the same time. The yield on six-month paper has fallen to 1.7 per cent now from more than six per cent in July last.
Senior bankers say the T-bills rates seem to have bottomed out and there is little possibility of the rates recording any significant fall now.
The sharp cut in the treasury bills aimed at dissuading banks from over-investing in them and driving them to larger and cheaper loans has met its objective to a great extent. Private sector credit has expanded by a huge Rs102 billion between July/ March 2002/03 for a host of reasons — the loans becoming cheaper being one of them. The weighted average lending rate of all banks combined fell to 9.36 per cent at end-February 2003 from 12.17 per cent in July 2002.
Whereas the treasury bills rates have been on the decline the SBP has been holding its discount rate stable at 7.5 per cent since November last. This is indicative of the fact that the SBP is no mood to further ease off its stance on monetary policy.
Central bankers say since the discount rate has been intact it would be in appropriate to deduce from the T-bills rate-cuts that the SBP is easing off its monetary policy. But larger than anticipated inflows of foreign exchange into the banking system has enhanced the liquidity levels to an extent that the SBP cannot but let the T-bills rate fall — if the banks cannot employ their surplus funds somewhere else. The private sector credit expansion of Rs102 billion in the first nine months of this fiscal year against an original target of Rs94.7 billion and revised target of Rs50 billion show that the banks have clearly read the signals the SBP has been sending through T-bills rate cuts. But senior bankers say neither private sector can expand exceptionally in the last quarter of the fiscal year (April- June) because of credit retirement season nor they can leave their excessive funds unemployed and book heavy opportunity cost.
So the only choice for them now is to channelize a major part of their surplus liquidity towards treasury bills and long-term Pakistan Investment Bonds. This, however, does not mean that they are not making efforts to boost private sector credit even during the credit retirement season. Only recently major banks have offered larger than normal financing facilities to private sector giants in textiles, energy and telecommunication sectors at much cheaper rates. The process goes on.
Whereas lowering of the lending rates by banks has directly benefited the private sector the decline in the yield on six- month treasury bills has made export finance cheaper as it is linked with the T-bills rate. Export finance rate or the rate at which banks lend to eligible exporters is four percent effective for this month. This is due to fall further next month because of the decline witnessed in the T-bills yield in the month of March.
