September 4, 2003	Thursday	Rajab 6, 1424

KARACHI, Sept 3: Treasury bills yields went up on Wednesday as the State Bank moved cautiously to give floor to short term rates and lessen the woes of bank depositors who are getting a negative rate of return.

Weighted average yield on three-month and one-year T-bills rose to 1.37 per cent and 1.92 per cent respectively from 0.99 per cent and 1.39 per cent on August 6.

Senior bankers said the yields improved by 38 basis points and 53 basis points quite in line with their anticipation. Bankers quoted by Dawn in a story published on Tuesday had anticipated an improvement of 30-50bps in the yields. “But this improvement does not indicate the SBP is tightening its monetary policy,” said a central bank official who refused to be named. This statement has a grain of truth as the improvement in the yields on T-bills seen on Wednesday show a mere recovery in actual terms: before falling to 0.99 per cent and 1.39 per cent on August 6 weighted average yields on three-month and one-year T-bills stood as high as 1.65 per cent and 2.14 per cent respectively.

Bankers said the market was anticipating an improvement in T-bills yields so widely on Wednesday — and priced the bids accordingly — that the State Bank had to miss its sale target to block a bigger increase: the central bank sold Rs19.80 billion worth of T-bills on Wednesday to drain out Rs19.48 billion from the system against the sale target of Rs30 billion. Had the State Bank stuck to its target the T-bills yields should have risen more sharply and that would have been mistaken as a signal that tightening of monetary policy was on the cards.

DEPOSITORS WOES: Sources close to SBP said what had prompted the SBP to send signals prior to the T-bills auction that the yields would improve was its concern for the depositors woes. To have a fair idea of what treatment the banks are meting out to their depositors one should not only look at the weighted average rate of return that fell to a humiliating low of 1.90 per cent at end-June against the annualized inflation rate of 3.5 per cent. “You should also look at specific numbers — what exactly a bank is giving to its depositors,” said an annoyed central banker who declined to be identified.

The latest figures show that leading local and foreign banks are handing out to their depositors 1.35-3.90 per cent annual return on one-year term deposits. Even the highest rate would turn almost negative after adjusting it for inflation of 3.5 per cent plus payment of 10 per cent withholding tax and Zakat etc.

Following are the rates of return on one-year deposits being paid by different banks: (i) National Bank 3.5pc (ii) Habib Bank 3.25pc (iii) Union Bank 3pc (iv) Askari Bank 2.5pc (v) Citibank 1.8pc (vi) Standard Chartered 1.35pc (vii) ABN Amro 1.49pc and (viii) Faysal Bank 3.93pc.

The rates of return being paid on profit and loss accounts are even lower — 0.1pc to 1.0pc on deposits worth less than Rs100,000.

This state of affair has shaken the central bank officials — though belatedly — and they now want the banks to stop further cut in the rates of return on bank deposits — and also improve them.

The latest increase in T-bills rates would help in accomplishing this task for the banks. Top bankers say they were forced to cut deposit rates to make room for slashing lending rates to employ their excess liquidity. They say with the T-bills rates improving they will get a reasonable rate of return through investment in the same and would not have to lower the deposit rates further.

WHEN WILL IT HAPPEN? Bankers say the rates of return on bank deposits for the months of July and August may either remain static or see a slight fall. “But from September onwards you can see the rates improving gradually as the SBP moves to stabilize T-bills rates would have its impact with a time lag,” said head of a local bank.

He said much would also depend on how quickly the SBP comes up certificates of deposits — a new monetary tool designed to suck in excess liquidity from the banking system. Bankers close to SBP say CDs may be launched anytime this month or at the beginning of the new quarter in October.

BANKS PROFITS: Senior bankers say the SBP move to stabilize T-bills rates is good for them also as it would improve their interest incomes that have been on the fall in the wake of declining T-bills rates amidst high liquidity.

“Once this happens we would not necessarily have to lower the deposit rates every time we are up for slashing lending rates,” observed a bank treasurer.

EXCHANGE RATES: The stability in the short-term interest rates that the SBP is going to secure through increase in T-bills rates will also help it in managing the exchange rates in line with the requirements of the economy.

With the T-bills rates having been at historic lows — at times even lower than LIBOR or London inter-bank offered rates — the trend of re-dollarization of bank deposits is creeping in. Besides a stable dollar in the local inter-bank market is leading exporters to hold their export proceeds as long as they can under the rules. This is resulting in short supply of foreign exchange at a time when the government is planning to pre-pay foreign debts.

It is against this backdrop that the State Bank now seems set to let the dollar shed some of its extra weight. “The first step in this direction is stability of interest rates — and that the SBP is trying to secure through its market-based moves to let T-bills rates improve,” said treasurer of a big foreign bank.