KARACHI, April 30: Banks eroding interest in government papers was reflected in the treasury bills auction on Tuesday when bids offered by banks were Rs92 billion less than the target announced by the State Bank, and the amount raised was Rs100bn less than the target.

The first quarter report of the banks also showed that banks profits dropped by 15pc and mainly because their interest income saw a steep fall due to big slash in the policy interest rate.

Since the departure of the government in mid-March, a change is being noticed in the State Bank’s policy as it has started discouraging banks to invest in government papers.

On Tuesday, the target for the auction was Rs250bn while the government could get only Rs150bn as the bids offered by the banks were to the tune of Rs158bn.

The State Bank has been injecting liquidity much less than the gap in the banking system signaling banks to avoid blind investment in government papers.

According to the State Bank report, maturity of the papers on the auction of April 30 was Rs296bn which means a liquidity gap of Rs146bn was left in the banking system.

The impact of low return on government papers appeared for the first time during the first quarter of the current calendar year.

Most of banks showed fall in their profits and mostly because their interest income fell down.

Research report of Topline Securities issued on Tuesday said that the top five local banks reported an erosion of 15.6pc year-on-year earnings in the first quarter of 2013.Allied Bank, Habib Bank, MCB Bank, National Bank and United Bank cover 72pc of banking market capitalisation.

In the first quarter of 2013, these banks reported after tax profit of Rs20.2bn versus Rs23.9bn in the first quarter of 2012.

Banks in their reports argued that the 6pc profit on saving deposits on average balance also affected the profitability of banks.

“Net interest income (NII) of top five banks declined by 8.4pc year-on-year basis and 8.7pc on quarter-to-quarter basis to reach Rs45.1bn in the first quarter of this year,” said Topline report.

Analysts said that banks have started planning to find new products to return to the markets which were abandoned by them as government remained a key borrower from the banking system.

During the last five years, the government grossly increased its domestic debt and sucked up the money from the banking sector.

The State Bank recently reported that the stock of the treasury bills held by the banks was Rs2.675tr till mid of March.

Banks were investing in short-term government papers which indicates that they believe that interest rate may see an upward change in the coming months, according to a banker.

However, analysts said that inflation may further fall to below 6pc which rubs any hope for higher interest rate in the near future.