KARACHI, July 8: Banks resorted to much lesser discounting last month as the liquidity crisis that had hit them in May in the wake of growing tension on Pakistan-India borders eased off.

The term discounting refers to the banks borrowing from the central bank for upto three days against government securities at a fixed interest rate called the SBP discount rate or repo rate.

Sources close to the State Bank told Dawn that the banks had to make overnight borrowing of only about Rs25 billion in June down from more than Rs130 billion in May.

“The reason why there was lower discounting in June was that inflows kept coming in through maturities,” said treasurer of a state-run bank meaning that the government paid back to the banks the money it had earlier borrowed from them through treasury bills and other government securities.

In May banks were hit by a liquidity crisis amidst growing tension on Pakistan-India borders and were forced to visit the SBP discount window quite frequently to square up their daily positions. The tension on the borders had led many people to withdraw money from banks. This affected the overall liquidity levels. In addition to that some banks had over-invested their surplus liquidity in the treasury bills and were not willing to lend to other banks that were short of cash.

As the situation on the borders improved and money started flowing back into the system the overall liquidity also rose. Besides the erring banks that were sitting on billions of surplus funds were driven by the State Bank to start lending into the market. This enabled banks to do business without making big borrowing from the central bank — and the discounting figure fell sharply from Rs130 billion to Rs25 billion.

Senior bankers say the inter-bank market is still wallowing in surplus liquidity with call rates lying flat at 1.5-2.0 per cent against the SBP discount rate of 9 per cent.

Bankers estimate the surplus liquidity around Rs7-8 billion.