August 7, 2003	Thursday	Jumadi-us-Sani 8, 1424

KARACHI, Aug 6: The yield on three-month and one-year treasury bills fell sharply on Wednesday when the State Bank siphoned off Rs51 billion from the financial system by selling these bills to excessively liquid banks.

The SBP said in a statement that the weighted average yield on three-month paper fell to 0.99 per cent from 1.65 per cent whereas the weighted average yield on one-year T-bills declined to 1.39 per cent from 2.14 per cent.

The central bank had to lower the yield on three-month bills by 66 basis points to raise Rs10.22 billion through their sale. Likewise it had to cut down the yield on one-year paper by 75 bps to mop up Rs41.12 billion by selling them into an excessively liquid inter-bank market.

Senior bankers said the auction of T-bills had generated total bids worth Rs95 billion of which the SBP accepted Rs51 billion bids and rejected the rest. In doing so the central bank remained closer to the pre-auction sale target of Rs45 billion. The bills were offered for sale to suck in an additional liquidity of Rs44 billion that the market received on Wednesday through maturity of previously sold T-bills.

Senior bankers admitted that not all bids worth Rs95 billion were backed by real liquidity available with the banks and that some of them were speculative in nature. “I think the market had total liquidity of not more than Rs70 billion,” estimated a senior banker. That was exactly why even after the acceptance of Rs51 billion bids by the SBP the market was still flushed with extra liquidity — and three-month and one-year paper traded in the secondary market at rates lower than offered by the SBP in the auction.

Senior bankers said the three-month paper was seen trading upto 0.80 per cent and one-year paper at 1.10 per cent after the auction.

BANKS UNHAPPY: The Wednesday lowering of the treasury bills rate added to the misery of the banks that are at their wits’ end to understand why the central bank is allowing the rates to crash. “Nobody knows where the rates would bottom out,” said treasurer of a bank. “Maybe the SBP guys would bring down the rates to zero,” he said with a tinge of sarcasms. “The falling down of the T-bills rate to these levels means we are going to see our profits tumbling too low,” said another banker meaning that frequent falls in T-bills rate would force banks to cut their lending and deposit rates further.

Since July last year the weighted average yield on three- month and one-year treasury bills have seen a huge fall of 4.82 and 5.42 per centage points respectively: In July 2002 the weighted average yield on three-month and one-year papers stood at 5.81 and 6.27 per cent respectively.

EXCESS LIQUIDITY: Central bankers say the T-bills rates have been on the fall primarily for two reasons: Banks have been flooded with rupee funds created against rising home remittances and exports — and that the government borrowing from the system has remained negative. They say whereas rising inflows through remittances and exports are good for the economy and no country would wish to see them fall — the government could start mega infrastructure projects to help banks employ surplus liquidity for economic growth. At the same time excess liquidity should also be used efficiently to finance the private sector needs. In the last fiscal year private sector credit disbursement touched a record Rs138 billion mark.