KARACHI (July 19 2006): The State Bank of Pakistan (SBP) tightened its monetary stance and enhanced the Cash Reserve Requirement (CRR) and Statutory Liquidity Ratio (SLR) by five percent, thereby, reducing the lending ability of the banking system by around Rs 120 billion.

In a significant move, the SBP on Tuesday raised the CRR from five to seven percent and the SLR from 15 to 18 percent of the deposits with effect from July 22, 2006. With Rs 70 billion in Treasury Bills maturing in this week, banks will have to quickly raise another Rs 50 billion to meet the new requirements by Saturday.

According to informed sources, the rise in CRR would mean depositing additional Rs 40 billion with the SBP, in cash, on zero percent rate of return. And, enhancement of SLR would force banks to shift Rs 80 billion of T-bills towards the SLR, thereby, restricting their usage for borrowing and conducting repo deals on the interbank market.

As an incentive to banks to mobilise long-term deposits, the SBP has lowered the weekly CRR to three percent on time and demand deposits exceeding six months tenor. At present 13 percent of bank deposits exceed six months tenor, while 18 percent of deposits are kept in the government securities.

Business Recorder understands the SBP had discussed raising of SLR and CRR with key banks without getting into specific details. At present lending to deposit ratio of the banking system is around 72 percent. However, some banks have reportedly advanced 79/80 percent of their deposits.

By enhancing the SLR, the SBP is trying to force banks to invest more in T-bills. It will help the SBP to offload some of its own T-bills holding and also check banks from asking a premium on fresh purchase of short-term government paper. And, at the same time it will force banks to mobilise deposits by raising the return paid to depositors.

What is perplexing some bankers are conflicting signals emanating from the central bank. Since April 2005, the SBP has kept the discount rate at nine percent.

Through its daily OMO operations, the SBP has been draining out liquidity and consistently closing the gap between the T-bills yields and the discount rate. In the National Credit Plan, the SBP on July 3 kept monetary expansion target at 13.5 percent, equivalent to the nominal rise in the GDP.

Just last week, the SBP lowered the export refinance rate by 1.5 percent. All these moves amounted to an accommodative monetary policy to support government's growth objectives, whereas Tuesday's announcement signifies monetary tightening.

It is aimed at reducing expansion of private sector borrowings. This will definitely push the average lending rates (Kibor) by at least 100 to 200 basis points. Weak banks will also be forced to borrow at call rates on the interbank market by 2 to 4 percent more.

The arbitrage opportunity for exporters will also increase by five percent or more. Therefore, the SBP will have to be more vigilant to ensure that credit lines under ERR scheme are not misused by exporters for investing in real estate and the stock market.

The SBP's action is also expected to raise lending rates for consumer financing. At present, 23 percent of the bank advances constitute consumer portfolio.

According to an accountant's view, the SBP's cost on lowering of export refinance rate is around Rs 2 to 2.5 billion. The SBP's earning on enhancement of CRR is around Rs 3.6 billion.

With the SBP holding T-bills stock of around Rs 500 billion, the rise in T-bill yields along with a possible downward movement in rupee-dollar parity will enable the central bank to easily make the Rs 35 billion contribution pledged to the federal budget 2007.

Discounting the accountant view, economists feel the SBP has taken this decision after looking at all monetary aggregates and implications in feeding inflation.

July-August is normally a retirement period for bank advances. Hiking of CRR and SLR was a timely move and banks can halt further advances.

However, the time frame given by the SBP of four days to adjust CLR and SLR is too short. Banks would require at least two to three months to raise deposits by Rs 120 billion.

According to the SBP's web site, as of end of May 2006, total scheduled banks deposits are Rs 2.733 trillion; loans (Rs 2.115 trillion); and investment (Rs 821 billion). The end of June figures are expected to be Rs 50 billion higher. Thus far, June 30 data has not been posted since the SBP takes time to finalise its year-end balance sheet.

The SBP circular issued on the Tuesday says:"Presently banks are required to meet Cash Reserve Requirement (CRR) of 5% on weekly average basis (subject to daily minimum of 4%) and Statutory Liquidity Requirement (SLR) of 15% of their time and demand liabilities. Both CRR & SLR are calculated on the basis of total Time and Demand Liabilities, without making any distinction on the basis of tenor of liabilities.

In exercise of the powers conferred upon the State Bank of Pakistan under Section 36 of the State Bank of Pakistan Act, 1956 and Section 29 of the Banking Companies Ordinance, 1962, SBP has decided to revise the reserve requirements with effect from 22nd July, 2005 as under:

CASH RESERVE REQUIREMENT (CRR) Weekly average of 7% (subject to daily minimum of 4%) of total Demand Liabilities (including Time Deposits with tenor of less than 6 months); and

Weekly average of 3% (subject to daily minimum of 1%) of total Time Liabilities (including Time Deposits with tenor of 6 months and above).

STATUTORY LIQUIDITY REQUIREMENT (SLR) 18% (excluding CRR) of total Time and Demand Liabilities.

(In the event of premature withdrawal of Time Deposits of over 6 months, banks would be required to maintain, from the date of withdrawal and for the period for which they have availed the benefit of lower CRR, an additional CRR equivalent to 4% of the amount of such pre-mature withdrawal).

Further, all Time and Demand Liabilities, except borrowings from SBP and interbank borrowings, shall be accounted for in the calculation of Time and Demand Liabilities for the purpose of CRR and SLR. The break-up of Time and Demand Liabilities to be used for calculating the required CRR and SLR is given in the enclosed annexure-A. Moreover, the separate CRA and SCRA in US dollar against FE-25 Deposits would continue to be maintained at the prescribed rate."

Copyright Business Recorder, 2006