KARACHI, May 16: A number of banks on Thursday had to borrow Rs14.1 billion overnight funds from the State Bank at a fixed discount rate of 9 per cent as they found themselves short of liquidity.

The huge discounting pushed up overnight call rate to 8.90 per cent in the inter-bank market.

Bankers said all this happened due to the over-excitement the banks had displayed while participating in Wednesday auction of treasury bills — some of them had invested more money in T-bills than they had.

The discounted value of the bids generated by the auction was Rs45.9 billion. Against that the State Bank had accepted bids worth Rs38.7 billion. “One third of the bids had come from the banks that were actually not very liquid,” said treasurer of a leading local bank. He said the market was not long by more than Rs20 billion on Wednesday adding that an inflow of Rs6 billion through maturity of previously sold T-bills had raised the level of excess liquidity to Rs26 billion.

“The SBP had no choice but to accept most of the bids to keep the interest rate stable,” said treasurer of another local bank. He, too, was of the view that a good part of the total bids were those that were not backed up by real liquidity. “The banks had become overexcited.”

The roots of this over-excitement could be traced to the fact that the inter-bank money market had been excessively liquid for some time and banks with surplus liquidity were eager to invest all of it in T-bills.

Some banks also had to hedge their future needs of cash-flow.

Senior bankers said they were anticipating more discounting in next two days. Some of them said the central bank might call an open market operation to inject some liquidity into the system.

Sources close to the State Bank say the central bank knew that the Wednesday auction of T-bills had generated more bids than the actual excess liquidity available in the market. But it decided to accept Rs38.7 billion worth of bids against the sale target of Rs6 billion to keep the T-bills rate stable.

“In the process the central bank also taught a lesson to those banks whose bids were not supported by enough liquidity,” one of the sources said meaning that the SBP action forced these banks to cover up the resultant shortfall in liquidity through an expensive discounting at 9 per cent: On Wednesday the overnight call rate was only 1 per cent.