MONEY WEEK: bank credit increases by over Rs 29 billion amid increasing government borrowing

Domestic bank credit on March 5, 2005, rose by over Rs 29 billion in a week--probably the highest in a week since the beginning of the financial year. Nearly 40 percent of it (Rs 14.3 billion) was accounted for by government borrowings [mainly governments' budgetary borrowings (up Rs 12.1 billion)] and about 19 percent by non-government sector [mainly private sector credit (up Rs 5.2 billion)].
Surprisingly, well over 41 percent of overall domestic credit expansion was due to OINs or other items (net) of the banking system, ie, items about which it was not yet clear whether expansion on their account belonged to the private sector, public sector enterprises or the government sector.
The State Bank would probably have to tighten the screws on scheduled banks to enhance their reporting efficiency so that OINs of scheduled banks, especially of commercial banks, become only an insignificant part of credit expansion/contraction. Additionally, data on governments' budgetary borrowings during FY05 so far (up Rs 17.2 billion) revealed that these were entirely from the State Bank and were equally shared by both the federal government and the provincial governments. Changes in bank credit to Public Sector corporations and SBP credit to NBFIs were negligible in magnitude. Accumulations of net foreign currency assets of the banking system during July 1 to March 5 (2004-05), in the meanwhile, stood at Rs 37.1 billion showing a contraction of Rs 8.5 billion over the week ended on February 26, 2005.
In a nutshell, utilisation of bank credit by domestic economic elements and drawdown of international reserves during the week resulted in a week-end monetary expansion of about Rs 21 billion with money supply during the year so far, surging to Rs 292.2 billion or 11.8 percent compared with the full year revised target of Rs 360 billion or 14.5 percent. Component-wise, currency in circulation increased by Rs 8.6 billion over the week to Rs 106.3 billion on March 5, 2005, while deposit money rose by Rs 12 billion to Rs 185.9 billion during the same period.
Notwithstanding the increase in currency in circulation of Rs 8.6 billion, reserve money declined by Rs 5.7 billion to Rs 113.1 billion on March 5, 2005, as the net impact of increase in currency in circulation was completely offset by declines in scheduled banks' balances with SBP (down Rs 11.2 billion) and scheduled banks' cash in tills (down Rs 3.3 billion).
The aforementioned changes, in money supply and domestic and foreign assets of the banking system was a reflection of the following changes in the provisional accounts of both the State Bank and the scheduled banks as on March 5, 2005:
After recording declines in total assets/liabilities for four weeks in succession, the provisional accounts of the Issue Department of the State Bank showed that total assets/liabilities on March 5, 2005, increased to Rs 713.8 billion, showing an increase of Rs 5.4 billion over the week. Break-up of the change revealed that, on the assets side, Issue Department's holdings of GOP securities rose by Rs 10.4 billion to Rs 171.4 billion while those of approved foreign exchange fell by Rs 5.1 billion to Rs 477.8 billion. On the liabilities side, notes in circulation increased by Rs 5.5 billion to Rs 713.6 billion. Total assets/liabilities of Banking Department of SBP, in the meanwhile, decreased by Rs5.7 billion to Rs 592.6 billion. Major changes on the assets side involved declines of Rs 6.9 billion in investments in government securities and Rs 1.4 billion in loans and advances to scheduled banks for export sector. Other assets also declined by Rs 1.2 billion. The largest increase of Rs 4.3 billion occurred in approved foreign exchange. On the liabilities side, deposits of banks declined by Rs 11.0 billion, followed by a decline of Rs 2.8 billion in deposits of Federal Government while deposits of provincial governments increased by Rs 5.4 billion.
For the week ended March 5, 2005, increase in total assets/liabilities of scheduled banks was limited only to Rs 3.1 billion compared with a quantum jump of Rs 39.4 billion in the previous week so that total assets/liabilities rose to Rs 3303.7 billion. Major increases on the assets side occurred in investments in treasury bills (up Rs 14.7 billion), general advances (ie other than those to banks) (up Rs 5.3 billion) and other assets (up Rs 4.5 billion). On the other hand, the largest decline in assets occurred in balances with State Bank (down Rs 11.2 billion) followed by declines of Rs 3.3 billion, Rs 1.3 billion, Rs 1.1 billion and Rs 0.6 billion in scheduled banks' cash balances, other investments, bills purchased and discounted and investment in central government securities, respectively.
On the liabilities side, scheduled banks' total demand and time liabilities rose from Rs 2312.8 billion on February 26, 2005 to Rs 2325.3 billion on March 5, 2005, showing an increase of Rs 12.5 billion over the week. Within this total, demand deposits (general) increased by Rs 18.8 billion to Rs 1148.3 billion while time deposits (general) remained almost unchanged at Rs 1079 billion. Among other liabilities heads, borrowings from banks abroad and capital and reserves increased by Rs 2.6 billion and Rs 2.4 billion, respectively, while other liabilities and borrowings from State Bank declined by Rs 12.9 billion and Rs 1.3 billion, respectively.
Private sector credit continued its upward push during the week (up Rs5.2 billion) to reach Rs327.7 billion on March 5, 2005 mainly on the back of commercial banks. Expansion in export credit during the year so far receded to Rs 19.6 billion compared with Rs 19.9 billion last week and Rs 20.5 billion in the comparable period of last year. Outstanding level of credit under export finance revolving among exporters, in the meanwhile, rose to Rs 108.0 billion on March 5, 2005 compared with Rs 88.5 billion on June 30, 2004, and Rs 58.5 billion a year before that.
Liquid foreign exchange reserves declined by $37.2 million in the week ended March 5, 2005, compared with a big decline of $48.4 million of previous week, to stand at $12,634.3 ($9823.9 million with SBP and $2810.4 million with other banks).
Range-bound trading was observed in the exchange market during the week as the rupee-dollar parity moved slightly on easy supply of dollars In the inter-bank market, the dollar was mostly traded in a narrow band at Rs 59.34 and Rs 59.35 for buying and selling, respectively. In the open market, the dollar, at Rs59.57 and Rs59.62 for buying and selling, moved upward only slightly compared with the previous week-end levels. Euro's appreciation versus rupee was once again the most characteristic feature of the week with euro crossing the Rs79 level for the first time on the very first day of the week.
Later on, the single European currency maintained its firm posture versus the rupee to close at Rs 78.75 and Rs 79.05 for buying and selling. While unprecedented rise in stocks contributed to the relative strength of the rupee versus dollar (with both ordinary investors and dollar holders attracted to business in stocks), the euro registered record gains against the local currency mainly on the back of weak dollar.(For comments and suggestions: [email protected]).