KARACHI, Sept 5: The banking system on Thursday resorted to Rs9 billion discounting from the State Bank discount window to overcome liquidity shortage.

Discounting means overnight borrowing from the SBP against the approved government securities at a fixed rate — currently at 9 per cent.

Senior bankers said the banks went short of liquidity after an outflow of Rs17 billion on settlement of the treasury bills auction conducted on Wednesday. The SBP had squeezed Rs17 billion out of a not-so-liquid inter-bank market through sale of six- month T-bills against the target of Rs6 billion: the target was set at Rs6 billion as the market was supposed to get the same amount of inflow.

“The SBP was not expecting that banks will be pressed to go for Rs9 billion discounting. The SBP believed that liquidity shortage would be much lesser even after Rs17 billion outflow,” said a source close to the central bank. “One of the reasons for liquidity shortage is that the banks are still waiting for the renewal of the export refinance limits of their clients,” said a foreign banker.

Every year banks seek renewal of export refinance limits of their customers in September that brings back into the system a couple of billion of rupees that remain stuck up with the SBP during the scrutiny of the documents. “This year there is some delay on the part of the SBP but we hope the central bank will renew the limits of our customers soon and we will get back the money that is stuck up,” said treasurer of a local private bank.

Some bankers said what else had contributed to the liquidity shortage on Thursday was outflow of a billion rupees or so from the inter-bank market through dollar/rupee swaps that the banks entered with the SBP on Wednesday. “Banks had bought about $18 million from the SBP in spot and sold the same in forward. Thus there was an outflow of about a billion rupees from the market,” said another banker.

Bankers said that reserve averaging was yet another factor that lowered the inter-bank liquidity on Thursday meaning that some banks put more money into their cash reserves to achieve weekly target of five per cent. Banks are supposed to keep five per cent of their total deposits as mandatory cash reserve with the SBP on weekly basis.

But they are allowed to let it fall to four per cent on any given day. So the banks that keep the cash reserves at four per cent in the early days of the week have to average it out to five per cent towards the end of the week. The averaging is normally done on Thursdays and Fridays.

Apart from the factors responsible for creating a liquidity shortage on Thursday one thing interesting has come to the fore: The banks had come up with total bids of Rs60 billion for T- bills of different maturities on Wednesday auction of which the SBP accepted bids worth Rs17 billion.

“How surprising it is that one day the market comes up with Rs60 billion bids and the very next day it has to go for a big discounting,” said a source close to the SBP. “This shows that part of the bids were speculative,” he added, meaning that the banks did submit bids for the T-bills without having enough liquidity.

“It is unfair to call the bids speculative,” retorted a local banker. “Banks came up with heavy bids for better management of future cashflows,” said a local banker.