KARACHI: The State Bank of Pakistan (SBP) injected Rs880 billion into the banking system on Friday, indicating that banks are still short of cash despite an increase of Rs1 trillion in deposits since the beginning of this year.

Banks have changed their investment pattern and are now investing in short-term papers amid hopes of interest rate hike in the coming months. This trend was visible in the latest auction of treasury bills held on Nov 9 when Rs291bn of the Rs398bn offered by the banks were for three-month papers.

The State Bank kept the interest rate unchanged in the previous monetary policy amid a constant rise in inflation. Bankers and analysts expect a slight increase in the interest rate in the next monetary policy.

Despite high growth in deposits, banks may continue to face liquidity crunch

Though banks have continued to invest in government papers, low interest rates slashed their profitability by four per cent in the third quarter. Bankers said uncertainty on the political front discouraged the domestic investment and banks became more risk-averse.

A latest SBP report shows that private sector’s net credit off-take during the four months to October was Rs43bn. The trend stood in a stark contrast to the previous fiscal year when the private sector borrowed Rs460bn from banks; that was highest in a decade and the government said it had succeeded in mobilising the local industry.

Banks have adopted a cautious approach since the beginning of the current calendar year, and lending to private sector fell sharply as a result.

“Net interest income (NII) of the sector declined by 4pc to Rs108bn in third quarter of 2016 as a major chunk of high-yielding, long-term [Pakistan Investment Bonds] PIBs (30pc of total outstanding PIBs or Rs1.2trn) retired in July,” said a research report of Topline Securities. “The banks booked high-yielding bonds at 12pc during 2013 and 2014 which have now been retired. Yields on these bonds have now come down by around 6pc since then. This has led to pressure to NII.”

Bankers said that despite high growth in deposits, banks would continue to face shortage of liquidity, but it would be less than the preceding year.

Another SBP report shows banks’ deposits grew by Rs1.141tr since January this year which has been an additional support for banks as their investment in government papers has been on the rise. In the last auction of T-bills, the bids for 12-month papers were rejected as banks were asking for higher returns.

Published in Dawn, November 12th, 2016