KARACHI, Feb 8: The State Bank has started punishing the banks that speculate in the inter-bank money market.

Bankers said the first to get the punishment was a large state- run bank that tried to corner the market in Wednesday’s auction of treasury bills. The bank had submitted a single bid of Rs4 billion for six-month T-bills at 5.10 per cent — a price lower by 1.24 per cent than last weighted average yield.

Bankers said some other banks also had come up with very low- priced bids for treasury bills, though not all of them had excess liquidity.

The fact that the auction target was only Rs4 billion, but the banks had submitted bids worth Rs24.7 billion, annoyed the SBP whose officials knew that the market was not that long — and that the banks wanted to speculate in treasury bills.

“So instead of sticking to the target amount the SBP accepted all the bids to teach the banks a lesson,” said a banker close to the SBP. But how on earth it worked? “Well...by accepting all the bids the SBP sucked in Rs24.7 billion from the market that was actually not that liquid,” explained a banker.

The result was most banks had to turn to the SBP discount window afterwards: In just two days (Thursday and Friday) banks borrowed overnight funds worth about Rs44 billion through discounting of T-bills and other approved government securities.

But where the punishment lies? Just here. The banks that had to borrow overnight funds from the SBP at 9 per cent whereas they could have borrowed it at 2-3 per cent booked heavy losses in two days. Those who had surplus funds but were submitted cheapest bids for T-bills also ran high opportunity cost.

“The bottom line is this: The SBP is in no mood to spare those who speculate in the inter-bank money market to their advantage,” said treasurer of a foreign bank. “The central bank also wants banks not to try to determine the course of monetary policy by forcing it to make unnecessary adjustment in T-bills yield.”

But on Wednesday the State Bank could not help doing this — as it had become unavoidable: The SBP did lower the treasury bills yield by 43-77 basis points in different tenors — this time around not to indicate any big change in the monetary policy — but to teach some erring banks a lesson. “Had the banks not submitted a large volume of bids without the market actually having that much liquidity the SBP might have cut the T-bills yield only modestly,” said a banker close to the SBP.

LENDING RATE: But there are others who say that the central bank has knowingly made another sharp cut in lending rates just to make the bills less lucrative for the banks.

If T-bills become less attractive for banks naturally they will increase their private sector lending and in order to do so they will have to reduce their lending rates. “That exactly what the SBP is looking for,” said a central banker.

Since July this year the SBP has slashed its discount rate by five per cent to 9 per cent. It has also cut down weighted average yield by 6.91 per cent to 5.64 per cent, but banks have so far been reluctant to make any significant downward adjustment in their lending rates.