"Yes liquidity is tight but there is no shortage. Yes some individual banks having very high advance to deposit ratio may be facing difficulties; but by and large the big network banks, as well as middle tier banks are not facing difficulties. And, the banking system overall is sound", says the State Bank of Pakistan.
If ADR is at 75 and the effective SLR is lower than 19 on account of exemption of term deposits and effective CRR is 7 instead of nine percent due to exemption of export refinance etc - even then there is no excess liquidity in the system.
While agreeing with SBP that the system overall is sound, bankers disagree that there is ample liquidity in the system. "If the SBP does not reduce the CRR by at least two percent, some small banks and non-bank financial institutions will have to shut their doors and this could have a domino affect thereby creating a systemic risk," warn senior bankers requesting anonymity.
According to SBP sources, the overall advance to deposit ratio of the system is around 75 percent. While most reputable banks ADR is between 64 and 77 percent, there are some broker-owned banks and some Islamic banks whose ADR is between 95 and 100 percent or even more. But they are on the fringes.
There is pressure on some big network banks to lend on call to other banks. Facing extremely tight liquidity situation due to Eid cash withdrawals and also a perceived higher risk about these small banks, they are charging higher rates. On Monday, the overnight call rates hovered between 17 and 28 percent.
If ADR is at 75 and the effective SLR is lower than 19 on account of exemption of term deposits and effective CRR is 7 instead of nine percent due to exemption of export refinance etc - even then there is no excess liquidity in the system, claim some senior bankers. We have to discount the multiple effect at this time, as there is no credit creation at present in the system, said a banker.
SBP estimates that there is Rs 145 billion of excess liquidity. Bankers say that between Rs 70 and 80 billion from this amount needs to be reduced, as banks due to poor communication system and lack of technology have to keep this amount in cash in branches to meet sudden needs of their customers. There is definite nervousness among customers but it is totally uncalled for and the rumour mill and the bad mouthing by some of them is not helping either.
The root cause of the entire "banking crisis" is a loose fiscal policy. Heavy borrowing from the banking system by the government to pay public sector overdues relating to circular debt (between utilities, private power producers, oil marketing companies and the refineries) plus sudden withdrawal of deposits by some PSEs (around Rs 30 billion) to ease government borrowing from SBP has put pressure on the liquidity in the system.
The downgrading of Pakistan by rating agencies has not helped either as automatic denial from traditional sources is bound to kick in. Fortunately, the Western banks are caught in turmoil and have not paid attention to this. Right now there is a distribution issue in respect of liquidity which has resulted in a chaotic situation (and some banks bouncing cheques of large amounts ie a couple of billions each). This has added to the disarray.
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