KARACHI: Banks have been unable to utilise surplus liquidity as the federal government seems to have discontinued borrowing for now while the private sector is still reluctant to enter the money market, banking experts said on Monday.

Even though the federal government has been the biggest borrower of banking money, it has refrained from doing so after an injection of Rs2.7 trillion liquidity by the State Bank.

“The surplus liquidity is waiting for the government to return after spending the huge supply of profit by the State Bank,” said a senior banker.

He said the private sector was still not ready to enter the market despite a substantial decline in interest rate. The State Bank has slashed the interest rate by 450 basis points during the current fiscal year while more cuts are expected.

Analysts say investors feel the investment climate is still far from friendly

“The real interest rate is still positive by more than 10 per cent. The private sector will keep watching a further decline in interest rate, which looks imminent,” said the banker.

Since Sept 16, the State Bank has not provided the data which provides information about private sector borrowing. The liquidity surplus was reflected when the banks provided Rs300bn to the Pakistan Agric­ulture Storage and Supplies Corporation and Rs160bn to the Trading Corporation at the rate minus Kibor (Karachi Inter-Bank Offered Rate).

“On Monday the benchmark six-month Kibor rate was 14.6 per cent and has been coming down steadily,” said S.S. Iqbal. He said the central bank would not slash the interest rate by any big margin and would prefer to bring it down step by step.

Equity market

However, it was also noted that banks did not enter the equity market; instead foreign buyers and mutual funds have pumped money.

“The mutual funds have invested $31 million in one month in the equity market while the foreign buyers invested $2.8m on Monday alone,” said Tahir Abbas, the head of research at Arif Habib Limited.

Banks have also been unable to use the liquidity for car leasing as the demand has declined sharply at a time when car companies are offering vehicles on instalments, with some offering even at zero markup.

“The banks’ leasing for car has been falling for the last 26 months, plunging to Rs270bn from Rs360bn in 2022,” said Mr Abbas.

Bankers believe the government would soon return to the money market since the debt servicing amount is too big for it. However, banking experts said the government had an opportunity to re-profile short-term domestic loans and increase long-term bonds — the Pakistan Investment Bonds.

In the previous auction of treasury bills held on Oct 2, the government rejected all bids for three-month t-bills and raised Rs244bn against a target of Rs250bn. However, the banks offered total bids of Rs860bn, reflecting their eagerness to invest in government securities.

The surplus liquidity with banks is another headache for them as the government has decided to slap a 15pc tax on banks having an advance to deposit ratio (ADR) much lower than required under the rules.

In reply to a question, a banker said the 17.5pc policy interest rate is very high for the private sector since the political and economic risks are still there.

“A business-friendly environment is still far from reality because the economy is not performing well. It’s still risky to enter into business, as reflected by foreign investors’ behaviour,” said a senior banker.

He said despite all security, incentives and sovereign guarantees no foreign investors have come forward.

Published in Dawn, October 8th, 2024