KARACHI: Commercial banks have enough liquidity to finance the private sector despite investing heavily in government instruments, Governor State Bank of Pakistan (SBP) Ashraf Mahmood Wathra said on Monday.

However, responding to a number of issues and complaints raised by the industry and business leaders in a meeting at the Federation House, the governor agreed that banks prefer to invest in treasury bills (T-bills) and Pakistan Investment Bonds (PIBs) rather than in other sectors of the economy.

He attributed the phenomenon of banks’ higher investment in bonds and T-bills to government and public sector needs.

The SBP governor disagreed with a participant that deposits of account-holders are not returned by banks that go for liquidation. Pakistan’s banking sector had a better record than many regional countries, he said. He also assured that account-holders of KASB Bank would get their funds back in six months.

On monetary policy, he said tighter fiscal control did not restrict economic growth, instead “it has helped bring down inflation”. However, he said interest rate could be reduced further if need be.

On a question that why the SBP was baulking at the idea of a cut in interest rate despite drop in oil prices, the governor said inflation was not the only factor in this regard.

Contesting a point raised by a member of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) that inflation was still high, Mr Wathra said that in developed countries the rate was kept at around 2 to 2.5 per cent, but it was always high in developing countries.

Citing an example, he said Russia injected $80 billion into the banking system to keep its currency stable, but ended up pushing interest rate as high as 17 per cent.

The State Bank, he said, has to work under a mandate to ensure stability in prices, finance and exchange rate, and all these aspects have to be addressed in a monetary policy.

The business leaders complained of high banking spread and criticised the government’s focus on revenue collection alone.

On financing of small and medium enterprises (SMEs), Wathra admitted that a rate of four per cent was low as it should be around 15 to 20 per cent. He said SBP’s incentives under Prudential Regulation for SMEs covered risk of up to 40 per cent of financing.

He informed that Housing Building Finance Corporation’s (HBFC) board of directors had been reconstituted and a cell for mortgage financing was being set up. The HBFC owed the central bank Rs14 billion and the amount was being converted into equity which would help the corporation to revive, he added.

The SBP governor said it was encouraging that the country’s foreign exchange reserves crossed $15bn billion mark on Monday after touching as low as Rs$3bn about a year ago.

FPCCI President Zakaria Usman, Arif Habib, Dr Ikhtair Baig, Aqil Karim, Hussain Lawai, Mian Anjum Nisar and senior vice-president FPCCI Shaukat Ahmed also attended.

Published in Dawn December 23th , 2014