KARACHI, May 30: The State Bank has stopped misuse of held-to-maturity securities by banks and DFIS and said that these securities could neither be sold nor used for borrowing.

The SBP had issued a circular on Sept 24, 2004 which stated that the banks and DFIs were required to classify their existing investment portfolios into “held-for-trading”; “available-for-Sale”; and “held-to-maturity” categories by September 30, 2004.

“It has been observed that some of the banks and DFIs have moved their risky portfolios to the held-to-maturity category to avoid booking revaluation deficit and categorised their good portfolios in rest of the two i.e. held-for-trading and available-for-sale categories,” said a circular issued on Tuesday.

At the same time the banks and DFIs are using held-to-maturity securities for managing liquidity by entering into repo transactions in the inter-bank market, the circular added.

The circular further said that this implied that they had categorised their securities as held-to-maturity without taking into consideration their ability to hold such securities till maturity.

To discourage the banks and DFIs from such practices, the SBP has decided that the securities classified as held-to-maturity by the banks and DFIs should neither be sold nor used for entering into repo transactions in the inter-bank market or borrowing under SBP repo facility and discount window with effect from July 1, 2006, the circular said.

However, the SBP allowed that the banks and DFIs for a one time reclassification of their securities ‘so that they can rationalise the distribution of their investments in the three categories as per their liquidity requirements and holding capacity.’

This process of reclassification should be completed by June 15. The banks and DFIs will also ensure that the securities acquired or purchased after June 15, 2006, should be, at the time of their acquisition or purchase, categorised.