KARACHI: The State Bank on Monday mopped up Rs202 billion from the banking system at eight per cent, which, according to bankers, reflects the interest rate regime stays unchanged for another couple of months.

The borrowing trend has reversed since the installation of new government as it has borrowed over Rs600bn from SBP while the banks were left with excess liquidity.

During August, the central bank carried out 10 OMOs to mop up liquidity, first at the rate of 8.5pc and then at 8.55pc. It also mopped up excess liquidity five times in July.

However, the government was the net borrower from the scheduled banks before that and it borrowed Rs960bn in the previous fiscal year.

The inflows of liquidity through maturity of government papers have created a glut of liquidity in the banking system that may put them in trouble. Banks believe that the government will soon return to the banks for money.

During the last five years the banks kept investing into the government papers and left the private sector out of the banks’ money. More than 85pc of the banking money was invested in the government papers and the government appeared as the sole profitable risk-free client for the banks.

This situation has now turned around and the banks find it difficult to place their excess liquidity while their trust on private sector is at the lowest level. Last year, the private sector’s net borrowing was negative.

The government wants to gear up the private sector with cheaper money from banks and, for the time being, left the banks with their money to use it for the growth of the economy.

The absence of private sector from banks proved disastrous for the economy as the economic growth was crippled at an average rate of about 3pc during the five years.

The easy access of banks’ money for the government also encouraged higher fiscal gap. The government kept borrowing to meet its expenditure through banks instead of generating revenue with higher economic growth.

“Banks cannot take risk of lending to private sector particularly in the wake of terrorism, low foreign investment and absence of any attractive policy for domestic investment,” said a senior banker.

He said the banks paid heavy cost of non-performing loans in the past while the last five years provided a breathing space as the risk-free investment in government papers helped banks clean their balance sheets.

However, despite provisioning of billions of rupees, the balances sheets of banks were still loaded with non-performing loans. The NPLs of all banks at the end of March, 2013 were Rs612bn, according to SBP’s report.