KARACHI, Feb 23: As the banks start meeting rising demand for private sector credit they are reducing investment in government securities. This mainly indicates a change for the better in the banking culture , but it also indicates that interest rates may begin to rise shortly.

The total stocks of bank investment went up by Rs81 billion in the first quarter of this fiscal year from about Rs724 billion at end-June to Rs804 billion at end-September 2003. But in the second quarter, it declined by Rs59 billion from Rs804 billion at end-September to Rs745 billion at end-December 2003.

In January 2004 it further declined by Rs13 billion to Rs732 billion, according to data released by the State Bank. This figure represents investment by banks in treasury bills; Pakistan Investment Bonds; other central or provincial government securities and investment in shares and term finance certificates, etc.

Whereas investment made banks slowed down in the second quarter of FY04 and also in January 2004, the pace of credit disbursement by them gained momentum. Net credit disbursement by the banks to the private sector rose by Rs23.1 billion in the first quarter of this fiscal year.

The State Bank termed this credit offtake growth as unusual in its first quarterly report because in the first quarter of every fiscal year banks normally see a net credit retirement.

In the second quarter bank credit to the private sector shot up by another Rs133.7 billion and in the month of January 2004 net credit to the private sector expanded by yet another Rs49.8 billion.

This expanded the total stocks of bank credit to the private sector by Rs206.6 billion in seven months between July-January 2003-04. In the comparable period of the last fiscal year net credit disbursement to the private sector had expanded by Rs66.3 billion.

This faster growth in the private sector credit disbursement, particularly in the second quarter of this fiscal year and in January 2004 against a fall in banks investment portfolio points to rising expectations of interest rate increase.

Senior bankers say that most banks started taking a view at the start of the second quarter that interest rates would rise. What had fuelled this feeling was that treasury bills had rate almost bottomed out; there was a lot of liquidity in the market; cash holding was also on the rise and inflation was seen rising more rapidly than projected.

The expectations of interest rate increase coupled with higher demand for the private sector credit in the second quarter of FY04 not only contracted the overall stock of banks investment, it also changed the composition of the same. Investment in treasury bills fell, whereas investment in long-term Pakistan Investment Bonds went up.

Senior bankers say the same trend may continue throughout this quarter meaning that banks investment may not grow as fast as their private sector credit disbursement.

They also say that most banks would find it more profitable to invest in long-term PIBs as well as in stocks rather than in treasury bills. "The reason is that whereas the SBP may not allow the TBs rate rise according to the market situation (to help government raise cheaper loans) investment in other areas may yield more profit," said treasurer of a big local bank.