KARACHI, Oct 14: Banks that had run short of cash borrowed Rs25.6 billion overnight funds from the State Bank discount window on Thursday. On Wednesday also, they had borrowed Rs12.6 billion from the central bank.

The State Bank lends short term money for up to three days to the banks in need of cash against treasury bills at 7.5 per cent which is the discount rate of repo rate of the central bank unchanged since November 2002.

This rate is considered too high and as such a penal rate for the banks because when the market has enough liquidity banks can borrow overnight funds at very low rates from each other-at times even below 1 per cent.

This high penal rate discourages banks from running short of cash but sometime when the entire banking system is short of liquidity banks have no option but to turn to SBP for overnight borrowing.

That the banks ran short of cash on Thursday despite a huge inflow of Rs14 billion and were forced to borrow Rs25.6 billion shows the severity of the temporary liquidity shortage. Senior bankers say most banks fell short of cash as they had to average out their mandatory cash reserves on Thursday.

Banks are supposed to keep five per cent of their total deposits as cash reserves with the SBP but they are allowed to let it fall to 4 per cent on any working day except Friday when they are supposed to average it out. This means, if they have kept the cash reserves at four per cent of their deposits earlier in the week they will have to increase it to five per cent on Friday.

"We carried out this exercise today (Thursday) to avoid locking up our reserves till Monday," said treasurer of a local bank pointing to the possibility of Ramazan starting from Saturday. Banks remain closed for public business on the 1st of Ramazan.

Senior bankers say apart from the reserve averaging, banks were also short of cash because of a draw down on deposits ahead of Ramazan. People and businesses take out money from banks ahead of, and during Ramazan, to finance Eid-related spending.

Senior bankers said the temporary liquidity shortage may be over on Monday when the banks would be able to let their cash reserves fall to four per cent and the inter-bank market would also receive an inflow of Rs5 billion through maturing treasury bills. Because of the shortage of cash on Wednesday and Thursday inter-bank overnight call rates remained pegged at 7.40 per cent, closer to the discount rate.