THE STAGE is set for further cut in State Bank discount rate but banks seem little prepared to respond effectively to further easing of the monetary policy. Come what may—most banks would continue to invest more in treasury bills and other government securities than they care to lend to the private sector.

In the outgoing fiscal year, all the banks combined lent only Rs 30 billion to the private sector against the credit plan target of Rs 98 billion. Senior central bankers say privately that one of the reasons for this was that the banks tended to invest surplus liquidity into the government securities rather than initiating an aggressive credit marketing as the demand for private sector credit was low.

Let the figures speak for themselves:

At end-June 2001, the total investment in treasury bills by all the banks combined stood around Rs 124 billion: The amount shot up to Rs 231 billion at end-June 2002 with an additional investment of Rs 107 billion.

In other federal government securities (like FIBs and PIBs) the investment of all the banks stood at only Rs 101 billion at end-June 2001: By end-June 2002, the amount soared to Rs 154 billion, raising these investment by Rs. 53 billion in a single fiscal year.

Thus, the investment in treasury bills and other federal government securities put together rose from Rs 225 billion at end-June 2001 to Rs 385 billion- an additional of Rs 160 billion.

Let us see what these figures mean in the overall banking system.

At Rs 225 billion at end-June 2001, the investment in treasury bills and other federal government securities was 17.2 per cent of the total deposits of the banking system. And at Rs 385 billion at end-June 2002, it was 26 per cent.

Now let us look at these figures in relation to the additional deposits mobilised in 2001-02: the banks’ additional investment of Rs 160 billion in treasury bills and other government securities amounts to 93 per cent of the additional bank deposits during the period: The total deposits stood at Rs 1310 billion at end-June 2001 that went up to Rs 1482 billion at end-June 2002.

Stop here for a moment to have a look on how much the banks are giving to the depositors and how much they are charging from the borrowers. In eleven months of the outgoing fiscal year (between July/May 2001/2002) the weighted average deposit rate slipped from 5 per cent to 4.3 per cent whereas the weighted average lending rate fell from 13.74 per cent to 12.17 per cent. The gap between the lending and deposit rate narrowed only marginally from 8.74 per cent at end-June 2001 to 7.87 per cent at end-June 2002.

What transpires is that banking in Pakistan means mobilising deposits from people to invest in the government securities and earn a cool spread after handing out peanuts to depositors.

Small wonder than if a big business group progresses leaps and bounds after buying the government stakes in a state-run bank and is now eager to purchase another.

The banks do have enough money with them. But they are not focusing on lending to the private sector.Had this been the case the private sector credit offtake should not have fallen to record low of Rs 30 billion in the last fiscal year despite a depressed demand for credit.

As it appears, the banks have not been able to find new avenues of lending. But while saying so, one cannot ignore some other factors that had a dampening impact on the private sector credit demand last year. According to National Credit Consultative Council headed by State Bank Governor Dr. Ishrat Husain these factors were: (i) higher retirement of export refinance (ii) low prices of raw and lint cotton (iii) low inflation rate (iv) appreciation of rupee (v) higher CBR refunds; and (vi) financing through TFCs —term finance certificates. Add to this list, the much-lamented economic slump that lowered the GDP growth rate from targeted 3.7 per cent to 3.3 per cent or so.

Whereas business leaders do not challenge any of these factors which depressed credit demand but they are highly critical of the bankers role.

“The economic slump is a reality. But credit demand has not fallen mainly because of it. Rather the banks have become too restrictive in their lending policies,” challenges Sardar Muhammad Ashraf who represents the private sector on National Credit Consultative Council.

But senior bankers say they cannot ignore the credit quality of the borrower while lending money adding that it is not simply possible for the banks to give loans to anybody who walks in a bank branch.

“They must be good borrowers having a proper history of cash- flow management and a clean track record,” says head of credit division of a state-run bank.

“But the banks need to improve the monitoring of the credit quality—instead of refusing financing facility to borrowers particularly the small ones,” retorts Sardar Ashraf. He claims that most banks have literally stopped taking any risk on their lending. “The banks must try to mitigate the risk. But to stop taking risk means to stop lending,” he says.

This seems to be true particularly when seen in the light of growing banks’ eagerness to overinvest in government securities.

Lately, the central bank has also taken notice of this and in a recent auction of treasury bills in which it sucked in more than Rs 66 billion from the market—it even tried to teach the banks a lesson:

That they should limit their appetite for investing money in treasury bills and must stop making too large bids when they actually do not have that much liquidity.

The day the auction was held the inter-bank market had surplus liquidity of no more than Rs 30 billion—and the sale target of the auction was only Rs 20 billion. But the banks came up with Rs 70 billion bids most of which were obviously speculative. They did so to ensure that their surplus funds are invested at a better rate because they were anticipating a cut in the T-bills rates.

But by draining out Rs 66 billion from the market against the actual surplus liquidity of Rs 30 billion, the central bank forced the banks to resort to heavy discounting afterwards: Poor banks had to borrow overnight funds from the SBP discount window at a fixed 9 percent interest: Had they not submitted speculative bids and forced the SBP to siphon off more liquidity than present in the market they would easily have been borrowing overnight funds from the market at 5.00-5.50 percent.

This was how they were punished by SBP.

Now a million dollar question is whether the banks will refrain from making speculative bids in future—and whether they will also keep their appetite for treasury bills and other government securities to a reasonable level. Hopefully the answer should be Yes.

“Yes...because there is a growing awareness...that banks are giving very low return to the depositors and charge very high interest from the borrowers,” says head of a large foreign bank in Pakistan.

“That would eventually force banks to reduce their dependence on treasury bills and other government securities and look for fresh avenues of quality lending.”