KARACHI, Feb 16: The overnight rate has further dropped despite huge outflow of liquidity from the market. The State Bank on Thursday picked up Rs23.5 billion through the open market operation (OMO) to provide a support to the market from falling overnight rates. However, primary dealers said the market closed with three to 3.5 per cent rate.

The SBP picked up the liquidity for two days at 7.6 per cent return. Market dealers said the demand for liquidity suddenly dropped, while banks made an earlier arrangement to cover their positions regarding the CRR (Cash Reserve Requirement). Banks have to maintain five per cent cash with the SBP under the CRR.

The banks have been facing a shortage of liquidity for the last couple of months, but the sudden drop has created some liquidity surplus in the system. Analysts said that the liquidity might continue for another couple of days, but soon the market would face shortage.

A rapid growth in the credit offtake by the private sector has created a shortage of liquidity in the banking system. The private sector borrowed Rs273 billion from the banking system in the last seven months, while it was Rs289 billion during the corresponding period last year. The figures show a slight decline in the private sector credit offtake this year.

Banks’ advances to deposits have reached 77 per cent, which means that the banks have very slim availability of liquidity. Banks’ total advances have reached Rs2009 billion till January 2006.

Dealers said that the advances to deposits ratio showed very high use of liquidity by the banks. They said that in the wake of booming banking profits, there is a little chance that banks would like to slow down their rate of credit advances. Banks have been earning record profits for the last two years mainly contributed by a record high banking spread, which means that the banks were earning more and passing on little to their depositors.

The dealers said the situation would continue to persist throughout the current year — the year of tight monetary policy being followed by the State Bank.