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KARACHI, May 24: Big foreign banks operating in Pakistan are keeping a low profile to mitigate the risks to which they might be exposed in case a war breaks out between Pakistan and India.
“Basically we are trying to keep our nose above water,” said head of a leading foreign bank when asked by Dawn what foreign banks were doing to reduce the risks related to a possible war between the two nuclear nations.
“We are to ensure that liquidity level is all right and all gaps are covered and mismatch in lending and borrowing removed,” he said, but declined to be named.
“Limited withdrawals from rupee accounts are taking place,” he said, linking this exercise to the common tendency of “putting the money under the mattress at times of crises.” But he said it was only a short-term phenomenon and hoped that the money would flow back into the banking system soon.
His assessment seems to be right as things have started taking a turn for the better after indications received from India that it might delay a war with Pakistan: Karachi Stock Exchange 100- share index gained 135 points on Friday — the highest gain in a single session and the rupee also recovered more than one per cent in the kerb market.
“Foreign banks like all other institutions have taken steps for risk management,” said an official of a major European bank operating here, but he would not specify them. The official, who declined to be named, said most foreign banks were keeping a low profile.
A senior official of a leading American bank also confirmed that foreign banks were making market-based moves to mitigate risks associated with a possible breakout of war between India and Pakistan. But he said some banks, including his own had well- defined procedures to follow in any crisis. “So there is nothing special that we are doing now.”
Banking sources say most foreign banks have instructions from their head offices to square their positions. But no official word is available on this issue.
Foreign bankers admit privately that many of them had got such instructions, adding that they had already started removing mismatch in their lending and borrowing operations in the inter- bank market. Head of a leading foreign bank said he had already submitted a detailed report to his head office about the nature of the risks to which the banks would be exposed in case India and Pakistan wage a fourth war.
“We are trying to avoid taking long-term positions at this moment,” said a senior official of an American bank, but he and many other foreign bankers said this should not be taken as a signal that foreign banks are reviewing their long-term policy about Pakistan. Some foreign banks had reviewed their long-term policy immediately after the East Asian crisis in mid-1990s and had accordingly trimmed their operations also in South Asia, including Pakistan. The latest sale of Societe Generale Pakistan operations to an investment bank could be cited as an example.
DISCOUNTING: On Friday the on-going liquidity crisis in the inter-bank market slightly eased off and the market discounted by only Rs4.6 billion.
Senior bankers said it was the lowest discounting in more than a week. The market had plunged in a deep liquidity crisis last week when the State Bank had mopped up Rs38.7 billion through sale of treasury bills, whereas the market was long by only Rs20 billion. Because of this crisis the banks had been frequenting the State Bank discount window everyday and borrowing overnight funds to meet daily cash requirements. On Thursday the banks had borrowed Rs17.3 billion overnight funds from the central bank.
Senior bankers said what eased off the liquidity crisis on Friday was that several banks had borrowed overnight funds from the SBP on Thursday to keep more than required money in their cash reserves. “These banks made very little or no overnight borrowing from the central bank on Friday,” said treasurer of a leading foreign bank.
Bankers said two state-run banks had to visit the SBP discount window on Friday, adding both made a cumulative overnight borrowing of Rs2.2 billion. A number of other local and foreign banks borrowed Rs2.4 billion. The two state-run banks had also visited the SBP discount window on Thursday to borrow more than Rs7 billion overnight.
Senior executives of state-run banks say their banks have not experienced any unusual withdrawals in the wake of the war-like situation prevailing at the Pakistan-India border. But sources in the two banks say the continuing discounting by the state-run banks shows the banks are witnessing big withdrawals, though it is difficult to relate them to the threat of war from India.
“Our bank has witnessed some withdrawals during the past one week or so but for such a large bank as ours these withdrawals are not unusual,” said a source at one of the two state-run banks. “It is difficult to ascertain if people are withdrawing money in panic.”
