KARACHI, May 18: Banks on Saturday entered the third straight day of heavy discounting as the State Bank did not hold an open market operation to inject liquidity.

But heads of banks and other senior executives say the central bank would hopefully realize the gravity of the situation and call an OMO on Monday to inject liquidity.

Bankers said banks resorted to Rs17.1 billion discounting on Saturday as the central bank watched their helplessness from the sidelines: On Thursday and Friday the inter-bank market was seen discounting Rs14.1 billion and Rs16.3 billion respectively. So within a matter of three days a combined discounting of Rs47.5 billion took place, which shows the seriousness of the liquidity crisis the banks are facing these days.

Most bankers were expecting that the State Bank would pump in some liquidity in the cash-strapped inter-bank market on Saturday but their hopes were dashed as the central bank conducted no open market operation. It could not be learnt officially what stopped the central bank from doing this but sources close to it said the SBP wanted to make it a case of learning the lesson the hard way for the banks. They said the central bank was convinced that the market had gone short of liquidity after the banks came up with speculative bids in Wednesday auction of treasury bills. That had left the SBP with no choice but to mop up Rs35.7 billion from the market despite knowing that the market had not been that too long.

“The rising tension on Pakistan-India borders has added a new dimension to the ongoing liquidity crisis,” said head of a local bank. “Whereas it is difficult to say at this moment whether the tension has led to withdrawals from the banking system yet such a possibility can never be ruled out.” That is why maintaining a certain level of liquidity in the inter-bank market has become all the more necessary. Sources close to the SBP say the central bank is well aware of the situation and may call an OMO on Monday to pump in enough liquidity in the market.

Country head of a foreign bank also said he would not rule out the possibility of withdrawals of bank deposits but added that a large scale withdrawal was out of question.

“I do not think there are large withdrawals taking place,” he said refusing to go on record. He said there are several other reasons for the ongoing cash crisis.

“When interest rates were coming down during this fiscal year banks were lending at low rates...and were not much concerned about their liquidity level,” he remarked.

Now the banks have realized the need for being sufficiently liquid and are borrowing from each other. Hence the liquidity crisis.

But bankers generally admit that some banks are to be blamed for the present liquidity crisis. A big partly privatized bank is known for keeping itself too liquid even at the cost of refusing credit proposals of its clients.

“This bank and the likes of it over-invests in treasury bills to earn 2.0-2.5 per cent risk-free profit as the monthly average of overnight call rate is 4-4.5 per cent and the return on T- bills 6.5-7 per cent,” said a local banker.

This situation is not acceptable for the central bank that wants the banks to channelize more of their liquidity towards the private sector rather than investing in government papers.

“SBP moves aimed at teaching the banks a lesson should be seen in this light,” insisted another banker.