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KARACHI, Feb 27: Ten-year Pakistan Investment Bonds (PIBs) got a rave response from banks and corporates on Wednesday’s auction despite a one per cent cut in their coupon rate.
The State Bank received Rs26.6 billion worth of bids for the bonds against the target of Rs8 billion. But the SBP stuck to the target and sold only Rs7.9 billion worth of bonds through its primary dealers.
The SBP said the primary dealers sold the bonds at the cut-off premium of Rs3 per every hundred rupees. (This is just to work out the yield: these bonds are scrip-less and are issued in the multiples of Rs100,000). Late last month the SBP had lowered the coupon rate on 10-year bonds from 12 to 11 per cent in line with a one per cent cut in its discount rate announced on January 22.
Wednesday’s auction was the first time these bonds came up for sale at the reduced coupon rate and attracted many buyers. Senior bankers said many small local private banks and large provident and pension funds were keen on buying the long-term bonds on high premiums. “Institutions like State Life Insurance Corporation and Karachi Port Trust and many others were there...a number of local private banks and even some primary dealers were all buyers of the bonds,” said treasurer of a state-run bank.
He said large provident and pension funds had also come up with huge bids to buy the bonds though not all the bids were accepted by the SBP.
Primary dealers or the banks designated by the State Bank to sell government securities are seven in number. These are: (i) National Bank (ii) Habib Bank (iii) Union Bank (iv) Citibank (v) American Express (vi) ABN Amro and (vii) Standard Chartered.
Senior bankers attributed the huge response of the banks and other corporates in the long term bonds to a sharp decline in treasury bills rates since the start of the fiscal year in July.
“When the T-bills rates go down it naturally attracts banks towards PIBs,” said treasurer of a primary dealer bank. He said corporates and provident and pension funds showed keen interest in the long term bonds also because of the falling interest rate scenario. Even most of the term finance certificates are priced at floating rates with the SBP discount rate or T-bills rates being the base rate. That has drastically reduced TFCs yield as the discount rate has declined by four percentage points to 9 per cent and six-month T-bills rate has fallen by six percentage points to 6.4 per cent since July this year.
MATTER OF CONCERN: Senior bankers say higher holding of PIBs by banks is a matter of concern as it may put smaller banks in problem and defeat the government’s purpose to use these bonds primarily for non-bank borrowing. SBP officials say they know what is happening but they cannot stop banks from buying PIBs as far as they are not breaking any rule.
“Small private banks are playing with fire,” warned a senior banker who heads the treasury of a large state-run bank. “When the coupon rate on these bonds would start moving up after some time large holding of PIBs would wipe off their small capital.”
An SBP official, who declined to be named, said the central bank was aware of this danger. “But I think the situation is not as alarming as some people are painting it.”
The official said the SBP was keeping record of the changes in banks’ holdings of PIBs but he would not give the figure. Sources close to SBP put it around 40-50 per cent.
“Banks are not violating any rule while buying PIBs,” observed the official explaining why the SBP was not making any move to put checks on them.
The primary dealers are already required not to underwrite 30 per cent of any single issue of PIBs: Other banks that are not primary dealers can buy up to 15 per cent of any issue. “This rule is being followed.”
When the government launched PIBs towards the end of 2000 the purpose was to shift the focus of borrowing from bank borrowing to non-banks or corporates. But as banks have started piling up these bonds it would make it difficult for the government to reduce its bank borrowing and makeup the shortfall through higher non-bank borrowing.
