KARACHI, Sept 1: Banks have started moving towards risk-free easy money by investing in Treasury Bills, which rose by five per cent in July and 11 per cent in the fiscal 2006.

Bankers said that the condition of Statutory Liquidity Requirement (SLR), which was increased from 15 per cent to 18 per cent by the State Bank in July, 2006 was not the only reason for rising investment in T-bills.

During fiscal 2006, the SBP had increased the benchmark 6-month Treasury bills rate by 0.5 per cent, which made the return as 8.3 per cent. This increase gave an immediate boost to the banks’ investment and it rose by 11 per cent compared to only 1 per cent in the previous year.

“The SBP has again increased the benchmark 6-month T-bills by 0.5 per cent in July 2006 and increased the statutory requirement by 3 per cent to 18 per cent.

This would certainly increase the banks’ investment and the five per cent increase on month-to-month basis in July is a reflection of the policy,” said a banker. Analysts said that all the stakeholders would get benefit except the depositors, who get negative return on their hard-earned income.

“The higher investment of banks in T-bills would help the government to borrow more from the banking system to meet the requirement of huge expansionary budget announced for 2006-07,” said Abid, an analyst.

“The State Bank is locked-up with the huge volume of unsold Treasury bills stocks, which reached about half a trillion rupees. The banks’ investment would allow the SBP to off-load some of the stocks,” he said.

He said the schedule banks would also get benefit by investing into the risk-free guaranteed return T-bills.

“The benchmark 6-month T-bills would yield a return of 8.81 per cent, which is substantially higher than the return to the depositors,” said another analyst.

The weighted average lending rate in July 2006 was 10.42 per cent and the return on deposits was 3.09 per cent making the spread as 7.42 per cent.

The government, the SBP and the banks would get benefit but the depositors, whose money would be used, will not get the benefit,” said the analyst.

The analysts said the State Bank would succeed in getting results of tight monetary policy and bring the economic numbers within target. However, the credit flow towards the private sector would reduce and curtail the economic growth.

Industry sources said that the banks have increased lending for consumer financing to get return as high as 18-20 per cent. The share of consumer loans of banks has gone up to 21 per cent. The banks’ net income has increased. Banks higher net income was mainly driven by the consumer loans.

“A blend of higher consumer lending and risk-free investment in Treasury bills is a comfortable position for any bank but it would lead to higher interest rate for other sectors as the demand would go high,” said the analyst.