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SBP injects Rs 180 billion into banking system

18 October, 2008

SBP injects Rs 180 billion into banking system

KARACHI: The State Bank of Pakistan (SBP) on Friday announced the injection of Rs 180 billion into the banking system to ease the liquidity crunch that has held back banks from lending to each other. It also declared that Pakistan’s banking system was resilient and there was no need for anyone to panic.

In a late night press conference here, SBP Governor Dr Shamshad Akhtar said the cash reserve requirement (CRR) on all deposits up to one year maturity had been reduced by 200 basis points to 6 per cent while time deposits of one year tenor and above had been fully exempted from statutory liquidity requirement (SLR).

The two measures, which will be enforced from Saturday, will pump Rs 180 billion into the banking system. Besides, a 100 bps reduction in CRR to 5pc, as announced earlier, will result in addition of another Rs 30 bn from November 15. The SBP had already reduced the CRR by 100 bps on October 11.

As a result of these moves, by the middle of the next month, the SBP would have infused Rs 240 billion cumulatively into the financial system. “We want this liquidity to be effectively utilised, which means genuine private credit demand should be met,” she said, warning that the SBP expected the credit requirement to go up from November onwards.

The SBP has also allowed held-to-maturity securities to be used for discounting purposes and the limit to hold Pakistan Investment Bonds as SLR has been enhanced to 10pc from 5pc. “These steps are in addition to the open market operation being conducted to inject fresh liquidity.”

In another major step, Shamshad asked banks to maintain advance-to-deposit ratio (ADR) within a range of 70pc. While the average ADR is between 74 and 75pc, some banks are operating at over 100pc, she added.

“Banks with over 70pc advance-to-deposit ratio have been warned to bring it down within the next six months i.e. by March 2009.” However, she insisted that Pakistan’s banking system was resilient and there was no need for anyone to panic. “The State Bank is continuously monitoring the financial market and will take all necessary policy measures to ensure stability of the payment and financial system.”

Brushing aside apprehensions of default by small borrowers, she said consumer loans were only 14 per cent of the total advances. Default in corporate loans is 7pc against 2pc in consumer segment.

About the liquidity crisis, she said excessive government borrowing and huge appetite of public sector companies for cash were also the reasons for it. She did not deliberate on the inflationary effects of this additional liquidity, but said the SBP had taken all steps while taking into consideration its monetary stance.

The SBP governor said banks were now coming up with innovative tools to woo depositors, with one of the banks even planning to give upfront profit against guaranteed deposit. She belittled an observation of Finance Adviser Shaukat Tarin, saying allegations of cartelisation by banks to manipulate dollar-rupee parity were baseless. “This is sensationalism. The State Bank is very vigilant.”

Behaviour of exchange rate in the inter-bank market is normal whereas it is not in the open market, she opined. A few days ago, Tarin had told newsmen that a cartel of banks was behind the depreciation of the rupee.


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