KARACHI, Aug 19: Three banks combined borrowed Rs950 million from the State Bank on Thursday as the banking system ran short of cash due to a higher-than-targeted sale of treasury bills by the SBP on Wednesday.

Bankers told Dawn that three banks, including a big privatized bank, resorted to a combined discounting of Rs950 million - the first one of this fiscal year. This means that the banks borrowed this much amount from the central bank for up to three working days by pledging treasury bills at 7.50 per cent.

The SBP discount rate has remained unchanged at 7.50 per cent since November 2002 and is no longer regarded as the anchor of the monetary policy. The central bank has been using T-bill yields to signal shifts in its monetary policy.

But the discount rate still serves as a penalty rate for the banks that run short of liquidity and have to borrow money from the central bank to meet their daily requirements. Banks do this only when they cannot borrow at lower rates from the inter-bank market.

That exactly was the case on Thursday when overnight call rate or the rate at which banks lend money to each other for one day shot up to 7.50 per cent. Till Wednesday call rates ranged between 1.25 and 1.50 per cent.

But as the SBP siphoned off Rs47.7 billion from the inter-bank market, higher than the target of Rs35 billion through sale of six-month treasuries, it created a temporary liquidity crunch. Senior bankers say the liquidity shortage may start easing off next week with expected large inflows of funds through maturity of previously sold T-bills.

KIBOR MOVES UP: Karachi inter-bank offered rate or KIBOR also inched up as the banking system experienced liquidity shortage. Bankers said one-week and two-week KIBOR shot up to 5.13 and 3.76 per cent, respectively, on Thursday from 2.02 and 1.81 per cent on Wednesday.