May 25, 2008	Sunday	Jamadi-ul-Awwal 19, 1429

KARACHI, May 24: The banking system faced a liquidity crunch on Saturday, the first real impact of the State Bank of Pakistan’s decision to increase banks reserves with it.

As part of SBP’s interim monetary policy, banks on Saturday lost liquidity and the central bank had to inject Rs23.450 billion through open market operation.

The three-day reverse repo attracted highest rate after an increase in discount rate by the State Bank by 1.5 per cent to 12 per cent.

The reverse repo means the State Bank bought back treasury bills from commercial banks at the rate of 11.61 per cent. Banks that sold T-bills had to borrow liquidity at a higher rate of 11.61 per cent than the rate they were earlier getting on such bills.

The SBP increased the Cash Reserve Requirement (CRR) from Saturday for all deposits up to one year maturity by 100 bps to 9 per cent while keeping the CRR for deposits of over one year maturity unchanged at zero per cent. The Statutory Liquidity Requirement (SLR) is increased by 100 bps to 19 per cent of the total time and demand liabilities.

The calculations showed that the immediate impact came as there was an outflow of Rs62 billion from the banking system, creating a situation desired by the State Bank.

SBP Governor Dr Shamshad Akhtar stated on Thursday that the increase in the CRR was supposed to have an immediate impact on inter-bank interest rates by drying up excess liquidity; this can be ensured at present only with a concomitant rise in the SLR since the banks are already keeping government papers over and above the current requirement of 18 per cent.

The State Bank believes that the positive outcome of this decision is likely to be an increase in deposit mobilisation by banks as liquidity shortage would push them to generate more deposits.

However, bankers said in the wake of such a high inflation, the saving rate would drop further and banks would find it more difficult to generate deposits.

“Higher inflation consumes saving or additional income of small depositors as higher spending is real outcome of the high inflation,” said a senior banker.

He said people also spend money instead of saving with a perception that their deposit would be ‘devalued’ with a rate much higher than the rate of return on deposits.

The SBP has fixed minimum saving rate as five per cent which sent waves of shocks to the banking industry, especially the five big banks whose average rate of return was between two and three per cent.

Banks found the decision against the banking industry which had been enjoying booming profits for the last four years.