KARACHI, Nov 19: Banks have been facing serious shortage of liquidity, which further pushed the lending rates up while heavy discounting was witnessed on Monday, market sources said.

The money rate was just below the discount rate in the inter-bank money market leaving only option for banks to borrow from the discount window.

The banks borrowed Rs15.7 billion from the State Bank while they borrowed Rs59.7 billion last week. The prevailing liquidity crunch forced banks to borrow at 9.9 per cent from the market as it was hard to find liquidity.

“One of the major reasons for liquidity crunch is the sudden demand of the market, which accelerated the advances of the banks,” said a banker.

The last quarter of the calendar year has been traditionally a high lending season as textile industry absorbs most of the liquidity. The season is the peak of cotton arrival and ginning process, which requires huge liquidity to keep their machines working.

The bankers said despite tight monetary policy the flow of liquidity towards the market was very high.

Banks’ seasonal lending has started to get momentum and, as per the weekly data (on November 10, 2007), the banking sector advances witnessed a growth of 2.3 per cent (Rs56bn) to Rs2.5trn in 4th Quarter 2007 (to date).

During the same week last year; the growth in advances was recorded at 1.9 per cent (Rs43bn).

However, the growth in advances was slower during the first three quarters mainly on account of tight monetary policy, which substantially reduced the growth in advances.

During the 9 months, 2007, the banking sector advances witnessed a marginal growth of 1.7 per cent (Rs41bn) to Rs2.45trn compared to 9 per cent (Rs188bn) in the corresponding period last year.

The State Bank on Monday announced treasury bills auction but the target (Rs50bn) set for the auction looked too big under the current liquidity crunch scenario.

“The auction is important as we expect that the central bank may offer some higher rate to attract liquidity,” said an analyst. However, he said the interest rates were already higher and any change in upward direction would cost more to the market.

Industrialists and other market borrowers have been complaining against the high cost of borrowing as most of the banks lending was in the range of 12 to 18 per cent. The prevailing liquidity crunch would further tighten the situation to create more suitable environment for higher interest rates.