KARACHI, May 20: The State Bank injected Rs7.25 billion into the inter-bank market on Monday but the injection was too small to satiate the cash-strapped banks. So they resorted to a heavy discounting of Rs12 billion towards the end of the day.

As the day started the SBP announced to conduct an open market operation to ease off the liquidity crisis that had hit the banks last week: So serious was this crisis that the inter-bank market had resorted to three consecutive discounting totalling Rs47.5 billion. But bankers said that the OMO failed to generate enough response from the banks making it impossible for the central bank to inject the required amount of liquidity in the market.

The OMO raised only Rs12.5 billion offers whereas the market was short by around Rs20 billion. To add insult to injury many banks offered very low prices for buying treasury bills leaving the SBP with no option but to discard unreasonable offers.

That naturally minimized the scope of liquidity injection — and the central bank could pump in only Rs7.25 billion through one-week and two-week reverse repo of treasury bills at 6.50 per cent.

“Then the banks that were still short of liquidity resorted to Rs12 billion discounting (at a fixed rate of 9 per cent),” said treasurer of a large local bank.

“Thus the banks had to pay the price for being irresponsible,” he said. This means that had the banks participated in the OMO more aggressively they would not have to make overnight borrowing at 9 per cent and could have borrow one-week and two-week funds at a much lower rate. “It was quite unfair on the part of the banks to expect that the central bank would give them one-week and two- week funds at below 6.5 per cent whereas in the inter-bank market the rate was between 7-8 per cent.”

The point the banker wanted to make was that the central bank could have injected at least Rs12.5 billion liquidity had the banks been willing to pay more.

But the question is what the central bank will do now? Will it conduct another open market operation on Tuesday to inject more liquidity — or let the liquidity crisis deepen? “I do not think the central bank would exercise the second option more so because of rapidly growing tension on Pak-India borders,” said treasurer of a foreign bank. Sources close to the central bank made a similar statement but they said that before conducting a second OMO the State Bank would try to ensure that the banks behave responsibly.

This means the SBP may tell the banks that if they want to put a stop on expensive discounting they will have to participate in next OMO in line with the actual liquidity requirement — and price the offers for T-bills reasonably.

Whereas it is yet to be seen how the banks behave in the next OMO, senior bankers fear withdrawals taking place from the bank deposits in the wake of continuing exchange of heavy shelling on Pak-India border. Central bankers privately admit that the fear is not baseless.

Some senior bankers say since the liquidity shortage on Monday was more pronounced than on Saturday suggest that limited withdrawals have already started. But they say it would take them some time to confirm whether unusual withdrawals have taken place in the past few days. That seems logical particularly in case of large local banks with several hundred branches scattered across Pakistan.