Banks seem content with low return

Published November 9, 2013
- File Photo
- File Photo

KARACHI: In the wake of higher inflation and expected increase in policy interest rates, banks are not even interested in investing in three-month treasury bills, instead excess liquidity is placed with the State Bank through OMOs.

The State Bank conducted open market operation thrice since Nov 1 and sucked up excess liquidity.

However, after a long time private sector witnessed a slight change as it received loans from banks.

The State Bank on Friday mopped up Rs117 billion through OMOs at 8.60pc.

A money market dealer said banks prefer placing their liquidity with State Bank even at 8.60pc instead of lending to the private sector which may offer much higher rates.

On the other hand, banks have shown leniency towards private sector and making advances. The latest report of the State Bank showed that the private sector has, so far, borrowed Rs36bn from banks which is a reverse situation compared to the same period of last year. However, it was clear that this money was rented for working capital or projects.

Working capital is a short-term exposure and less risky than project loans.

Last year, private sector borrowing during the four months was negative.

In fact, the sector retired Rs18bn during these four months. The private sector credit off-take which is over Rs36bn is termed as change by some analysts as it indicates that the low return on government investment compelled these banks to rent out their liquidity to private sector.

Last fiscal year witnessed net retirement of debt by the private sector and output of this negative trend was the low economic growth below 3pc.

When interest rate was brought down to 9pc per annum, trade and industry welcomed this scenario.

Banks remained cautious and extended loans to limited corporate sector, but prolonged low discount rate and low return to banks slashed banks’ profits compelling them to take risk of lending to the private sector.

During the nine months of this calendar year, banks profits fell in the range of 12 to 15pc.

Anticipating higher interest rate in the next monetary policy due in the mid of this month, banks invested only in the short tenure of three months treasury bills.

In the last auctions, banks invested Rs345bn for three-month t-bills and Rs1.9bn for six months while no bid was offered for 12 months.

Another odd situation for banks is that the new government has yet not decided shifting its borrowing from Central Bank to private banks.

The government has so far borrowed Rs599bn from SBP. During the same period last year, borrowing from SBP was negative Rs224bn.

The government has retired Rs285bn of scheduled banks during the last four months putting pressure on banks to place their liquidity other than government papers.

“Banks will not rent their liquidity to private sector till the interest rate policy becomes clear with the new monetary policy expected this month,” said S S Iqbal, a money dealer in the banking system, adding that there was 100pc chance for higher interest rate.

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