KARACHI, April 10: The State Bank on Tuesday warned the banks that it will cap their holding of Pakistan Investment Bonds if they do not voluntarily reduce it.
Bankers said two senior SBP officers told treasurers of more than a dozen banks at a meeting that the banking sector was holding 60 per cent of the PIBs issued so far.
They said SBP Economic Adviser Dr. Abdul Naseer and Executive Director Farhat Saeed made it clear that the banking system should not hold more than 25-30 per cent of these long-term bonds.
“The central bankers warned the banks that if they fail to cut their holding of PIBs on their own the SBP may have to cap it,” said treasurer of a private bank.
He said the SBP officials showed particular concern about high PIB holding by small private banks. Sources close to the meeting said the SBP officials told the treasurers of small private banks that in stockpiling high-yielding PIBs they are ignoring the risk factor. “What happens when if the yield curve reverses?,” was the question put to these banks. The central bankers feared that in such a case the small private banks may see part of their capital wiped off.
The sources quoted the SBP officials as saying that the banks should not hold 25-30 per cent of the total amount of PIBs, adding that every bank should monitor its holding in relation to its share in total time and demand liabilities of the banking system.
They said the central bankers warned that if the banks failed to do it voluntarily the SBP might have to make it mandatory on them.
The central bank started showing concern about high holding of PIBs by the banks early this year but it made no specific demand to the banks to bring it down. The SBP only made some moves in the market to signal to the banks that it would not like them to continue to hold large amounts of PIBs but most banks did not bother to respond to these moves.
Their plea was that so far they were observing all the rules relating to the PIBs sale and purchase their is no reason for them to put self-checks on its holding. Banks also ignored the marked-based signals because they knew that they could manage the risk involved in high PIB holding.
They also knew that it was not the risk factor alone that was bothering the SBP, but the fact that a higher holding of PIB by financial institutions reduces the government ability to raise loans from the non-bank sources.
Once the banks start holding the long-term bonds it forces the government to continue to borrow from banking sources. That in turn invites criticism by the IMF as the $1.3 billion IMF-backed poverty reduction and growth facility has set periodical targets for the government borrowing for budgetary support from banks.
“This is still true. The government borrowing comes first and the risk factor next,” said treasurer of a private bank, admitting that his bank was holding much large portfolio of PIB than what is prudent in the eyes of the SBP.
He said banks were prudent enough to choose the right avenue of investment. “When we realise that PIBs are not good for us we can get rid of them,” he remarked.
But treasurer of one of the primary dealers (banks selected by the SBP to sell PIBs) said when the PIBs were launched in late 2000 the purpose was to provide those institutional investors an avenue of investment who were stopped from investing money in national saving scheme. “The SBP had not designed PIBs for the financial institutions,” he said, justifying the SBP concern over high holding of PIBs by the banks.