KARACHI: Flow of banks’ investment in government securities has reached 96 per cent mark of their total investible funds, revealed the State Bank’s first quarterly report for the calendar year 2015.

The report shows that the banks kept investing in the government papers despite decline in the interest rates and return.

According to the report, banks invested Rs644 billion in the government papers in Jan-March, an increase of 81pc compared to Rs356bn in the same quarter of last year.

However, a vital change in the banks’ investment strategy was witnessed — they put more money for short-term compared to long-term investment.

Since the end of 2014, the long-term Pakistan Investment Bonds (PIBs) lost their attraction due to declines in returns on the back of frequent fall in the interest rates.

The sharp fall in the main inflation forced the State Bank to cut interest rate to a 42-year low of 7pc in the last monetary policy.

The auction held on June 17 noted that the cut-off yield on three-year PIBs fell to 8.09pc, while the yield on five-year tenor was 8.99pc. Most of the amount (Rs41bn) was invested for three-year papers, followed by Rs9bn in five-year tenor, indicating that the banks tilted for short-term papers.

Banks invested Rs222bn in PIBs for the first quarter compared to Rs759bn in the same period of last fiscal year. However, they invested Rs387bn in the treasury bills in the Jan-March quarter compared to withdrawal of Rs382bn a year earlier.

The difference on returns on three-year PIBs (8.09pc) and 12-month T-bills (6.82pc) has shrunk to 1.27 percentage points with the fall in interest rates. Bankers said it is visible that engaging money for three-year PIBs is a loss-making business while investing in 12-month T-bills provides much better opportunity for the use of money.

The SBP report said the mix of government securities, which changed considerably in favour of PIBs during July-Dec 2014, again started to tilt towards MTBs due to consecutive decline in policy rate.

“Given the risk-averse approach of banks, decelerated flow of advances due to both demand and supply factors and expectations regarding cut in policy rate, the amount offered by banks’ for both MTBs and PIBs exceeded the target value by considerable margins.”

Further, most of these investments were placed in Available for Sale (AFS) category from the perspective of liquidity management.

However, the banks failed to change their approach towards market economy and are still waiting for a better chance to place most of their liquidity in the government papers.

Another SBP report showed that credit off-take by the private sector in this fiscal year fell sharply compared to last year.

Published in Dawn, June 19th, 2015

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