May 15, 2003	Thursday	Rabi-ul-Awwal 12, 1424

KARACHI, May 14: The treasury bills rate is gaining stability as the banks — once crazy about putting the bulk of surplus funds into zero-risk bills — have become a bit realistic and are pricing the bids accordingly.

The State Bank on Wednesday sold Rs41.9 billion worth of one -year bills at a cut-off of 2.67 per cent down two basis points only from the previous cut-off. What made it possible for the SBP to stick to the sale target of Rs42 billion — and still keep the cut-off almost unchanged — was that most banks priced their bids a bit realistically. “Many banks came up with bids not too off-the- mark because they knew that SBP would stick to the target even if the bids were too low,” said treasurer of a foreign bank. The SBP has lately established the credibility of sticking to the auction target — even at the cost of allowing a steep fall in the T-bills yield. That is one reason why many banks now price their bids a bit closer to the previous level knowing well that the yield on the bills has almost bottomed out.

“But a more important reason is that private sector credit has picked up dramatically thus making the banks less desperate to invest surplus funds into T-bills at any cost,” said treasurer of a local bank. Private sector credit started picking up when banks started slashing lending rates — in the backdrop of fast falling yield on the treasury bills. The SBP had started signalling them to do this with the start of the fiscal year in July but banks somehow ignored these signals until December and in the mean time kept on investing the bulk of surplus funds into treasury bills.

PRIVATE SECTOR CREDIT: Now the situation has changed and a major cut in lending rates combined with a pickup in economic activity in the country has increased the demand for private sector credit which the banks have been meeting readily because they are still wallowing in surplus liquidity. According to the latest State Bank statistics the banking sector disbursed more than a hundred billion rupees credit to the private sector from July 2002 through mid-April this year against a revised credit plan target of Rs50 billion only.

“Another reason that now desist many banks from investing too much money into T-bills is that they know that SBP sterilization policy would work better in the days to come,” said treasurer of a foreign bank. He said since the central bank is set to start making pre-mature retirement of most expensive external debt it would naturally absorb part of the ever-rising inflow of home remittances — or money sent back home by overseas Pakistanis. With that the liquidity level would also fell. “Besides we anticipate a pickup in overall economic activity and particularly in public sector spending after the announcement of the next year budget,” said treasurer of a local bank — implying that banks are less bothered now about employing their future flows of surplus funds.

SPECULATIVE BIDS: Though most banks seem to have become a bit realistic about investing in T-bills but this does not mean they have given up their old habit of making speculative bid for T- bills. The Wednesday auction attracted total bids worth around Rs86 billion — about Rs74.5 billion for one-year bills and Rs11.5 billion for three-month bills-against the sale target of Rs42 billion. (The SBP accepted Rs41.9 billion bids for one-year but it did not accept any bid for three-month bills).