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KARACHI, March 22: The inter-bank market has been excessively liquid these days but corporate borrowers should not expect that they will get cheaper credit from the banks.
The market was so liquid that the State Bank had to siphon off Rs25.5 billion through sale of treasury bills this week against the target of only Rs6 billion. “But the problem is major banks do not want to part with excess liquidity,” said treasurer of a foreign bank. “Major local commercial have stopped lending to us in less than three-month repo,” he complained.
Foreign bankers say a week earlier two state-run and one semi -privatized bank had stopped clean lending to the foreign banks — a charge denied by two of these banks and accepted by only one.
“Now all three state-run banks and two partly privatized banks are not lending to the foreign banks in less than three-month repo,” said another foreign banker. But officials of four out of five banks denied the charge. A senior executive of one state-run bank indirectly admitted it by saying “why on earth foreign banks are so inefficient that they want to borrow from us and not from the rest of the market?”
Bankers estimate that the inter-bank market is still wallowing in excess liquidity not less than Rs6 billion despite an outflow of Rs25.5 billion through auction of T-bills.
“When the market open on Tuesday it should be long by Rs6-8 billion,” estimated treasurer of a foreign bank, adding that the amount of excess liquidity was in addition to what the banks used on Friday for reserve averaging. Banks are supposed to keep five per cent of their deposits as cash reserves on weekly basis but they are allowed to keep it at four per cent on a given day. That is why the banks have to average out their cash reserves on every Friday — the last working day of the week meant for this purpose.
“If you include the reserve averaging also then the market was long today by around Rs12-14 billion,” said the foreign banker.
EXCESS CASH RESERVES: Senior executives of state-run banks do not hide the fact that their banks are keeping much more money in cash reserves than required. “We are one of the most liquid banks and at times we keep much higher cash reserves than required,” said head of a state-run bank.
Since the five per cent mandatory cash reserves carry zero interest rate keeping higher reserves has an opportunity cost for the banks concerned.
“I wonder why the banks that keep higher cash reserves cannot lend surplus money in the inter-bank market,” says the country head of a foreign bank.
The story does not end here. Major local banks, including those in the public sector, admit that at times they also keep more than required amount of the money in statutory liquid reserves in the form of treasury bills and other approved securities.
President of one state-run bank even laments that his bank had booked heavy losses on the surplus stock of treasury bills in SLR after the SBP started slashing T-bills yield at the start of this fiscal year. Since July 2001, the central bank so far lowered the weighted average yield on six-month T-bills by about six per cent.
What worries the business community is that major local banks with two-third of the entire credit market are suffering losses through non-utilization or under-utilization of excess liquidity but even then they are not willing to reduce lending rates in a big way. Since July 2001, three state-run banks (namely National Bank, Habib Bank and United Bank) have reduced their combined weighted average lending rate by only 42 basis points to 14.08 per cent at end-January 2002. Two partly privatized (i.e. Muslim Commercial Bank and Allied Bank) have cut their weighted average lending rate by only 60 basis points to 14.76 per cent during this period.
On the other hand state-run banks have reduced their weighted average deposit rate by 17 basis points to 4.30 per cent between July 2001-January 2002 and partly privatized banks have cut it by 9 basis points to 3.81 per cent.
