Banks to keep 25pc cash with SBP: SLR, CRR increased
By Shahid Iqbal
KARACHI, July 18: The State Bank on Tuesday raised the cash reserve requirement (CRR) and statutory liquidity requirement (SLR) collectively by five per cent which means that banks will now engage their 25 per cent cash with the SBP.
The increase will tighten the liquidity position of banks and help the State Bank maintain tight monetary policy and keep the inflation target under control. This will, however, make money expensive and interest rates will rise. It will also have a negative impact on the level of credit flow towards the private sector.
The SBP in a circular on Tuesday announced the revision of reserve requirements with effect from July 22, 2006. According to the circular, now the CRR required weekly average of seven per cent (subject to daily minimum of four per cent) of total demand liabilities (including time deposits with tenor of less than six months); and weekly average of three per cent (subject to daily minimum of one per cent) of total time liabilities (including time deposits with tenor of six months and above).
At present banks are required to meet cash reserve requirement (CRR) of five per cent on weekly average basis (subject to daily minimum of four per cent) and statutory liquidity requirement (SLR) of 15 per cent of their time and demand liabilities. The banks are required to maintain the SLR at 18 per cent (excluding CRR) of total time and demand liabilities.
Analysts and bankers said the money would be expensive for the private sector as less credit would be available with banks for lending. Banks have been lending record credits to the private sector for the last couple of years.
“Money will be expensive and the Karachi inter bank offered rate (KIBOR) will see an immediate increase,” said Salman Jaffrey, chief dealer at JS brokerage house. There has been a demand for higher discount rate but the State Bank chose another option to deal with the situation. It slashed the availability of credit which would ultimately increase the KIBOR, he added.
The analysts believe that the SBP has not only got relief through this decision but will also keep the treasury bills rates unchanged.
The decision has been taken just after the announcement of relief for exporters. The SBP governor on Friday announced to reduce the export finance rate by 1.5 per cent. Now the exporters would borrow at 7.5 per cent (6.5 per cent by the SBP and one per cent by banks) as against the earlier nine per cent. The exporters will get highly subsidised money.
Though the surge in SLR and CRR will increase the interest rate, the exporters will get money at even cheaper than the previous rate. However, the decision will widely affect the private sector and the impact on overall private sector growth could produce some negative results for the government which has set a seven per cent economic growth target for the fiscal year 2006-07.
The lower private sector credit off-take will help the SBP maintain monetary assets growth which despite its all effort crossed the yearly target of 12.8 per cent during the last fiscal. The FY06 may see a monetary growth of over 14 per cent (final figures are still awaited), which is not desirable for both the government and the SBP.
The movement of lesser money will also help the State Bank keep inflation under control which remained above 8.4 per cent for most of the time during 2005-06. This year the inflation target is 6.5 per cent and the SBP believes that it is achievable.
