THESE are bad days for the banks. They are too short of cash to finance routine withdrawals. So, they are borrowing money from the State Bank discount window almost daily. The State Bank is also providing liquidity through the open market operations (OMOs).

But these injections are too small to satiate cash-strapped banks. There are several reasons for this liquidity crisis including heavy withdrawals made from the bank deposits after September 11. The ongoing pre-Eid withdrawals are also leaving the banks poorer everyday.

But instead of getting into the details of why the banks are short of cash, let’s see how it is affecting people, particularly businessmen. Bankers say, the liquidity crisis that began immediately after September 11, blocked a possible cut in their lending rates. They say had they not been hit by this crisis, they would have cut their lending rates in line with the SBP’s discount rate cuts. The crisis that started with panic-withdrawals after September 11 has deepened further leaving no room for banks to cut lending rates. Banks are borrowing an average of Rs 5-10 billion overnight funds daily from the State Bank against government securities at 10 per cent. Banks are also lending overnight funds to each other at no less than 9.90/9.95 per cent.

Who suffers? Because of tight liquidity conditions, the banks are denying credit to the private sector at cheaper rates. “They are neglecting the private sector credit demand because they are busy building treasury bills assets,” says a senior central banker. “Why shouldn’t we do it when we know that the discount rate and the T-bills rate may be cut further,” a commercial banker replies testily. So, here lies the crux of the problem.

The banks are short of liquidity but whatever liquidity they have they are using it for buying T-bills. That is why the statutory liquid reserves of the banking system now stands at 38 per cent against the prescribed level of 15 per cent. That is, each bank is keeping an average of 38 per cent of its deposits, instead of 15 per cent, in T-bills and government bonds. The 5 per cent cash reserves that they are supposed to keep on weekly basis, is in addition to it. The SBP officials believe banks can lend more to the private sector by reducing their investment in the government securities beyond the prescribed level. But bankers say that does not make sense for them.

They say they are investing heavily in government securities to make as much profits as possible before December. Because, in January they may be forced to cut lending rates as the SBP may further slash its discount rate and also keep the market liquid. Bankers feel that the SBP is not keeping the market sufficiently liquid during this quarter. Some central bankers admit this but they say this is because the SBP does not want a big rise in its net domestic assets. An unusual increase in SBP NDA goes against the IMF programme tied with a $1.3 billion poverty reduction and growth facility.

So, the private sector continues to suffer. Businessmen say they are not getting enough credit from banks. Official figures also show that between July-October net private sector credit remained negative. Bankers say it is still negative. That is, the private sector has so far borrowed less from the banks than the amount of previous debts it has cleared. Economists say this is an alarming situation. If net private sector credit does not pick up in October-December that covers the credit demand season, then it is bound to retard economic growth. In Pakistan demand for private sector credit remains high in October-March and it falls during April-September because of cash crop pattern.

Low credit demand: Apart from the fact that banks are not offering liberal credit to the private sector, the demand for the private sector credit is also sluggish. Pakistan’s economy grew 2.7 per cent in fiscal July/June 00-01 and is set to record not more than 3.75 per cent growth in 01-02. That is enough to prove the point that private sector credit demand is yet to pick up. But businessmen say, and bankers admit, that some sub-sectors of the large-scale manufacturing, and small and medium-sized enterprises are growing and need bank credit. It is where the banks may still employ whatever funds they have. That may not be as risk-free and profitable for them as their investment in government securities, but that is what they are supposed to do. Only a fool would allow the banks to keep investing in government securities at the cost of ignoring the trade and industry.

But bankers say it would be too much to expect from banks to employ funds for economic growth rather than for earning profits. “We can offer liberal credit to the private sector only if the government reduce its borrowing from banks,” says head of a local bank.

The net government borrowing for budgetary support was in excess of Rs40 billion in July-November. Under the terms of PRGF, the government will have to keep its net borrowing at minus Rs 54 billion at the end of June.

Some central bankers, however, justify huge government borrowings on the ground that it was meant for making up the fall in the private sector credit. “If both the government and the private sector stop credit intake, how on earth the economy will grow,” question a senior SBP official. But here again commercial bankers have their own view. They say if the SBP wanted the banks to lend generously to the private sector, it should have financed government borrowing on its own. “The government should have been allowed to borrow more from the SBP rather than from the banks,” says a head of a state-run bank. “Only in that case the banks would have been able to offer enough credit to the private sector-and at cheaper rates.

But that too, is not possible due to the IMF restriction on the volume of the government borrowing from the SBP.

Prime lending rate: As discussed above, banks may not reduce their lending rates before January when, they hope, the market would become a bit more liquid. Banks are pinning their hopes on two things to bring in more liquidity in the market: First, the SBP discount rate and T-bills rate would fall further; and secondly, the money withdrawn during Ramazan would return to bank accounts.

Meanwhile, the State Bank is pressing banks to introduce prime lending rates. The SBP believes banks can easily move their prime lending rates in line with the discount rate and T-bills rates. That is a must for making the monetary policy effective without dictating banks on the interest rate structure. But banks are divided on this issue. Whereas foreign banks do not see it as a problem, the state-run banks do. The three nationalized commercial banks are opposing the idea because they cannot compete with the foreign banks. The NCBs, of course, has much larger portfolios of bad loans than the foreign banks; and their cost of intermediation is also much higher. Central bankers say they hope to persuade the banks to do this by early next year.

“This is a far better option both for the banks and for the central bank,” said a senior central banker. “Instead of forcing banks, particularly the NCBs to cut lending rates and then invite the IMF criticism it is better to have a market-based benchmark.” “And for the banks it is easier to move the prime lending rates instead of revising their lending rates across the board.”