KARACHI, Sept 20: The State Bank has imposed penalties on many local and foreign banks that were effectively misreporting their holdings of Pakistan Investment Bonds. The amount of penalties differ in each case but it runs into tens of thousands of rupees.
Senior bankers say the SBP has penalized more than 30 banks on the charge that they misreported their actual holdings of PIBs.
They say the list includes almost all major local and foreign banks with a few exceptions. The fact that more than 30 banks have been penalized out of total 40 or so speak volumes about how widespread was the practice of keeping more than prescribed stock of PIBs as banks liquid reserves.
Banks can keep PIBs worth up to five per cent of their deposits as part of statutory liquid reserves with the central bank. But many local and foreign banks were keeping PIBs worth more than five per cent of total deposits in their SLRs.
Officials of the banks that have been penalized by the SBP say excess liquidity available in the system led banks to keep their SLRs higher than the required level i.e. 15 per cent of their total deposits. What has happened is this the banks having excess liquidity invested part of their surplus funds in the long term bonds and kept the same as part of their SLRs.
But bankers say in doing so the banks did not conceal the fact that they have in their SLRs the stocks of PIBs far beyond the maximum prescribed level of five per cent of their total deposits. “So in that sense there was no element of misreporting,” said a senior executive of a foreign bank that has been penalized by the SBP.
“But the point is when a bank keeps a higher than permitted stock of PIBs in its SLR it naturally shows a lower level of investment in government securities,” retorted a senior central banker. “This gives the SBP a wrong picture of banks investment in government securities—besides higher holding of PIBs by the banks themselves impede growth of a secondary market for the bonds.”
“The banks that did not report to us their actual investment in PIBs in any way committed misreporting,” said the central banker who declined to be named.
Bankers say since the overall banking system has been awash surplus funds keeping higher SLRs has become a norm with all banks. They say keeping a higher SLR comes as a natural choice for the banks having excess liquidity that do not want part of this liquidity to remain unemployed. Besides keeping higher SLR brightens the chances of banks securing a better credit rating.
Banks are required to keep an amount equal to five per cent of their total deposits as statutory cash reserve with the State Bank. On this they get no return. They are also supposed to keep 15 per cent of their total deposits as statutory liquid reserves in the form of approved government securities. While maintaining SLRs they continue to earn a return the rate of which depends on nature of the securities.
OBJECTIVE: Sources close to the central bank say it has been making efforts to develop a secondary market for PIBs and wants the banks to concentrate more on their core business of lending.
They say higher holdings of PIBs by banks hampers growth of a secondary market that defies the very purpose of launching these bonds.
The recent SBP decision to allow direct buying of these bonds by individual institutions upto 10 percent of the pre- auction sale targets is also aimed at facilitating growth of a secondary market for these bonds. In the PIBs auction due next month the corporates and the institutions managing pension and provident funds will be able to buy the bonds directly.
Earlier, when they used to buy these bonds through banks, the banks sometimes discouraged them from doing so or fleeced them by quoting wrong prices. The SBP will sell Rs25 billion PIBs early next month.