February 4, 2006	Saturday	Muharram 5, 1427

KARACHI, Feb 3: The State Bank has moved to bar banks from using up to Rs60 billion held-to-maturity securities for getting liquidity from inter-bank repo, which could put enormous pressure on small banks and development finance institutions (DFIs), while inter-bank rates could go further high.

The SBP has drafted a circular but is waiting for banks’ views on the subject to give it a final shape. Small banks and DFIs are worried over the draft as they have a small pool of liquidity.

“It has been observed that some of the banks and DFIs have moved their risky portfolios to the ‘held-to-maturity’ (HTM) category to avoid booking revaluation deficit and categorized their good portfolios in rest of the two categories, held-to-trading and available-for-sale securities,” said the circular yet to be made public.

The SBP said the banks and DFIs were using held-to-maturity securities for managing liquidity by entering into repo transactions in the inter-bank market. This implies that they have categorized their securities as HTM without taking into consideration their ability to hold such securities till maturity, said the SBP draft.

“To discourage the banks and DFIs from such practices, the SBP has decided that the securities kept as HTM by the banks and DFIs should neither be sold nor used for entering into repo transactions in the inter-bank market without the prior written approval of the SBP to this effect,” said the draft circular.

However, the SBP said these securities will remain eligible for borrowing under the SBP repo facility.

The monetary policy, which was recently released by the SBP, talks about decreasing banks’ reliance on the SBP discount window, while this circular would lead to a situation where a discount window visit would become a daily exercise for banks with HTM inventories, which they cannot finance from their own resources.

A periodic injection of liquidity, via discounting of HTM securities, is clearly in conflict with the tight monetary policy, which is exactly what would happen if banks were to resort to discounting for the financing of these inventories.

Small banks and DFIs, always running short of liquidity, would become permanent clients of the SBP discount window. A high official of a small bank said that now the SBP would earn money what the banks were earning through inter-bank repo.

“If the circular is implemented, it is not likely to cause any major problems to the banks that are, at present, obtaining repo financing against HTM securities. The reason being that the circular, even though it disallows banks from obtaining repo financing against HTM securities, still allows the banks to resort to the SBP discount window for repo financing against the same securities,” said Salman Jafri, an analyst at Jahangir Siddiqui.

What is slightly puzzling is that the banks are being allowed to access the discount window for repos against HTM securities, when the act of availing discounting is itself a clear indication that the banks are unable to finance these securities from their own resources.

Bankers said that the big banks like HBL, NBP and UBL would not be affected with the circular, if implemented, as they have enough capacity to hold the HTM till maturity.

Bankers and analysts believe that the amount under HTM would be in the range of Rs60-70 billion. They said that at least 40 per cent of the HTM is lying with the small banks and DFIs.