KARACHI, Jan 9: The government slashed the return on treasury bills after rejecting entire bids in the last auction, indicating that golden days are over for banks to earn highly attractive risk-free profits.

The government raised Rs208 billion through auction of treasury bills on Wednesday and most of the money was picked up for six months.

The cut-off yield on all three categories of t-bills was slashed by 9 basis points to 9.18pc for three months, 9.2pc for six months and 9.27pc for 12 months.

Earlier, banks remained stuck to government papers for their earnings. But the government has now changed its strategy and it rejected all bids during the last auction held on Dec 26 since investors were willing to get higher return on their money.

“Now government is borrowing on its own terms and banks are unable to place their large stocks of deposits other than government papers,” said a senior banker.

Banks offered bids worth Rs376 billion in the latest auction but the government picked up Rs208 billion.

Highest amount of Rs171 billion was raised for benchmark 6-month t-bills.

The banks have so far piled up Rs2.260 trillion into the government papers and more and more are being stocked at the same destination.

Bankers said it would be a nightmare for banks if government stops borrowing from banks and if it returns the borrowed money.

They said there was no place for such a huge liquidity currently lying with the government since economy is performing much below the required estimates of the government.

However, the government has amassed large deposits through general public by offering them better return under the National Saving Schemes.

A vital change was noted in the fastest growth of NSS as its deposits jumped by 290pc to Rs229 billion in the first five months of the current fiscal compared with the corresponding period of last year.

Bankers believe that higher return on NSS and continued falling return on t-bills has changed dynamics of the government-banks relations. It also diverted money from banks to NSS.

Analysts said it was expected as banks had been relying totally on lending to government for the last five years, and they had started ignoring the private sector.

Now they would be in search of potential borrowers from private sector that may not add more NPLs in their balance sheet.

The government had introduced another 50 basis points cut in the interest rate by mid-December that pulled down the interest rate to five-year low at 9.5pc.

Market expects more cut, if inflation remains stable under single digit that could further reduce return on government papers.