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KARACHI, Sept 1: The State Bank has finally realized that the continual cuts in the rates of return on bank deposits can be harmful — and has started making market-based moves to help banks avoid further cuts.
Senior bankers say the SBP decision to launch certificates of deposits (CDs) for sucking in excess liquidity from the inter- bank market is one such move. They say CDs will open up another avenue of parking surplus funds for the banks. This will minimize their need to lower the deposit rate to make room for reducing the lending rates whenever they are flush with excess liquidity.
As the weighted average deposit rate of all the banks combined fell to 1.90 per cent in June (against annualized inflation rate of 3.5 per cent) the bank depositors especially the smaller ones are in trouble: they do not have the expertise to invest funds into the stock market — and their savings are not big enough to introduce them to the world of real estate. The rates of return on national schemes have also been on the fall — the government has been readjusting these rates downwards on half yearly basis.
Bankers say they have to lower their deposit rates to make room for reducing lending rates — and they need to reduce the lending rates because they are flush with liquidity. They say that the presence of huge excess liquidity in the banking system has also resulted in constant lowering of treasury bills yield — and their interest incomes are falling. The cut-off yield on six-month treasury bills fell 8 basis points to 1.27 per cent on August 20.
SBP ACTIONS: It is against this backdrop that the State Bank has set a big target of Rs30 billion for T-bills sale this week indicating to banks that it was willing to offer them a higher yield now.
“We are anticipating a 30-50 bps increase in the cut-off yield of treasury bills,” said a seasoned local banker. He said had the SBP not been willing to improve the yield on T-bills it would not have set the target at Rs30 billion — matching exactly the inflow of a similar amount through maturity of previously sold T-bills.
On Monday SBP said it would invite bids for three-month and one-year T-bills on Tuesday-Wednesday with a total sale target of Rs30 billion. In the last auction of three-month and one-year T-bills held in the first week of August the cut-off yields on the two papers had fallen to 0.99 per cent and 1.39 per cent respectively. Bankers say these cut-offs may see an improvement of 30-50 basis points.
Bankers say what else is going to help the yields improve in the next auction is a reported statement of SBP head of treasury Mr. Zafar Shaikh that the central bank is set to introduce CDs or certificates of deposits for prudent interest rate management.
Senior bankers having background information say the SBP is introducing CDs as another tool for monetary management at a time when its stocks of treasury bills have depleted. “They do not have more than Rs60 billion worth of T-bills to conduct open market operations,” disclosed a source close to SBP. “So they just need another instrument for conducting OMO.” But another source privy to the development of CDs said depletion of the stocks of T-bills with the SBP is not the only reason for introducing CDs. He said whereas the central bank had been using T-bills for conducting OMOs both ways — i.e. sometime for sucking in excess liquidity and at other times injecting it into the system — CDs will be used only for siphoning off surplus liquidity.
“You can say this is a market-based version of special cash reserves that central banks are known for using to drain out excess liquidity from the system,” said a top banker close to State Bank. “It is a market-based version of SCR because banks will also get some return on it,” he said and added that CDs might be introduced within a couple of weeks without giving an exact deadline.
Senior bankers say the yield on treasury bills have already improved in the secondary market after word was out that the SBP was going to introduce CDs. The tenure of the new paper is not known but one thing is clear — it will be a short-term security.
Bankers say if the T-bills yield improve in the auction due on Wednesday and CDs are launched without delay the rates of return on bank deposits would stop falling.
“Rates of return on bank deposits may show a stable trend from September onwards,” said head of treasury of a local bank. “Figures for July and August may continue to show a falling trend — however small it may be — or they just remain below 2 per cent,” he said. At end-June the weighted average deposit rate of all banks was at 1.90 per cent.
