KARACHI, Jan 3: The State Bank’s announcement to extract Rs565 billion from the banking sector through treasury bills has shocked many bankers as banking sector’s market value plunged by 70 per cent during 2008,.

The State Bank released the schedule of T-bills auction on Thursday, the last day of the former SBP chief Dr Shamshad Akhtar in the office. The schedule carried information that the State Bank would sell T-bills worth Rs565 billion up to March 2009.

The banking sector is facing a liquidity crunch and the SBP itself took a series of steps to improve liquidity of the sector that shows the liquidity problem in the banking sector.

“I don’t know why this ambitious target of Rs565 billion has been set, but it will certainly affect banks-related economic activities as this huge amount, if invested, will be non-productive,” said a senior banker.

The government under an IMF condition is bound to reduce the fiscal deficit to 4.3 per cent of the GDP which substantially shrunk its spending. This goal is being achieved through massive cuts in developed projects.

However, the government still needs money to run its affairs. The need was fulfilled through borrowing of Rs688 billion from the State Bank during the last fiscal year.

“If banks put this money with the treasury bills, the money will not be used for development projects, and instead it will be consumed for government’s day-to-day affairs,” said the banker.

Bankers said it looks that instead of borrowing from the State Bank, the government has decided to fulfill its cash needs through commercial banks.

“Commercial banks are the vehicle of economy, and not the government,” commented Mohammad Imran, research head of the First Capital Equities.

The former finance minister of the present government had indicated that the government can withdraw its capital from commercial banks to meet its shortfall due to complete stoppage of borrowings from the State Bank.

The statement has shocked the entire banking industry as about a dozen banks have expressed fears of bankruptcy in case of withdrawal of government’s capital.

The IMF agreement tells the government that it cannot borrow from the State Bank and persuades it to raise funds through bonds, security papers and other instruments, like National Saving Scheme.

The government has raised returns on NSS up to 15 per cent and above which substantially attracted deposits, and in fact, a shift of deposits from the banks to the National Savings Schemes is taking places, thus slowing down the deposit growth of banks. With the slow deposit growth, banks will find it hard to invest in T-bills.

At the same time, banks lending to private sector will be hurt that will slow economic growth.

A report issued by the JS Securities said that the banking sector’s market capitalisation fell by 70 per cent to Rs425 billion as a result of which its weight in the KSE-100 index declined to 20 per cent from 25 per cent a year ago.

According to an analysis of 11 banks which cover 75 per cent of total listed sector market capitalization, banks underperformed by 13 per cent

“This underperformance was largely led by repercussions of the economic slowdown on the banking sector, particularly with regard to rising Non-Performing Loans (NPLs) which resulted in a four per cent profitability decline in nine months of 2008,” said the report.

The report said that the banking sector will continue to remain under distress due to a combination of economic slowdown, liquidity crunch and increasing asset quality concerns, which has forced banks to book heavy provisions for NPLs.

“Liquidity crunch has seen a dismal deposit growth in 2008 which was recorded at 4.6pc to-date,” said the JS report.