Of rumours and banks

Recently, frantic rumours came into light urging citizens to withdraw all their money from bank accounts and valuables from lockers as it was not safe to keep anything in the bank's custody anymore. They stated that all banks are facing a severe liquidity crisis owing to which accounts and lockers of the public could be seized any minute.
It turned out that no one knew anything concrete about the scandal and it was merely hearsay. Most of us, without even knowing what a liquidity crunch is, have vowed that our banks are suffering from it. Well one can't really blame anyone for that; because lets face it, we all at one point in time or the other have said something to indicate the same.
A liquidity crunch is a business condition that results in having too little cash and other current assets to be able to pay current liabilities as the liabilities mature. A liquidity crunch is a timing issue and not having enough liquidity can force one to make an emergency borrowing at a less than favourable interest rate.
How and why the general public got an over exaggerated picture of the liquidity problems that were being faced by the banks, is still a mystery. One possible source of this pandemonium may be the fact that some ATM's were out of cash during the Eid Holidays, but this problem stemmed more from inadequate planning and a conservative forecast of the monetary requirements of the population by the banks, rather than a major liquidity crisis.
This problem was misconstrued to such a great extent that despite the banking system being well equipped with the tools needed to fight off its cash deficit, it was losing the faith of the masses. The consequences of this propaganda were overwhelming as the situation was made worse due to excessive withdrawals from accounts, as well as the emptying of belongings and jewellery from lockers held by the general public, thereby making them vulnerable to robbery and theft.
Businesses are mostly based on credit undertakings and thrive due to the support of the banking system. The fabrications of facts lead to the retailers' lack of confidence in the Banking system as a whole, which in turn caused them to suffer exorbitant losses. Had the retailers continued to accept credit notes and not restricted transactions to cash only, they would not have succumbed to these losses.
The Pakistani banking system not only fell prey to negative publicity, but had to bear the brunt of this wide spread panic in the form of plummeting share prices and scores of accounts being closed down. What needs to be understood is that the banks were just facing a short-term liquidity pinch as approx Rs 1.3 trillion was withdrawn from banks during Ramazan and before Eid in order to pay Zakat and other religious obligations as well as financing of Eid expenses.
In the wake of the situation, banks have taken first hand measures to ensure the security of its customers' deposits and has tackled its liquidity problem to the maximum with the support of International Financial Institutions and the State Bank of Pakistan (SBP).
Recognising that the root cause of the cash shortfall in the banking system was due to the sudden drain of cash reserves arising from the abrupt shift of deposits of the public sector enterprises from the banking system to the SBP (even though technically the money stayed within the banking system), the Central Bank reduced the Cash Reserve Requirement (CRR) of banks from 9% to 7% in order to inject more liquidity into the system, thereby cushioning the blow to the commercial banks.
The State Bank of Pakistan went on to issue statements in print and electronic media to reassure the flustered citizens. Furthermore, commercial banks have imported big consignments of cash dollars in order to meet its cash requirements.
A very encouraging aspect is that the SBP is also fully conscious of its responsibility to maintain a tight monetary stance and has vowed to review its policy in order to ensure monetary stability and keep the rising inflation in check. SBP must also continue to press the banks to mobilise a higher level of domestic resources to fund their lending activities to mitigate the unforeseen problems that may arise in the future.
In the end, people need to rest assured that their savings are in safe hands and that there is a zero possibility of their deposits being frozen. Also it needs to be established that banks are now in a strong position to safely meet their clients' financial needs. According to some Bankers, most clients' nervousness has come to an end with a renewed sense of confidence and trust in the banking system.