KARACHI, Oct 17: The State Bank on Friday eased its tight monetary policy and announced a plan to inject Rs270 billion into the banking system to help the sector tackle a credit crunch and restore depositors’ confidence.

Governor Dr Shamshad Akhtar told media that with her fresh decision, Rs180 billion would be injected into banks on Saturday.

The banks are facing a serious liquidity shortage in making large payments and continuing to extend credit to the private sector. Bank-to-bank lending has also dried up while large banks have stopped lending to small banks altogether.

The liquidity will help banks ease depositors’ fears and scotch rumours that the government was considering seizing all deposits or that some banks could wind up operations. The governor dismissed all such apprehensions.

The Cash Reserve Requirement (CRR, which banks keep with the State Bank as reserve money) was reduced by two per cent to six per cent. It would be brought down to five per cent from Nov 15.

The SBP exempted time deposits of one-year tenure and above from the Statutory Liquidity Requirements (SLR), yielding another Rs120 billion to the market.

The governor said the central bank was examining the monetary policy and would bring corrections, if required.

The SBP had been maintaining a tight monetary policy for the past two and a half years, raising the interest rate and making money costlier for borrowers.

Although the bank argued that the interest rate was increased to check inflation, prices have gone through the roof over the past six months.

More easing of monetary policy is on the cards as the governor said that more media conferences would be held to provide details about further steps.

However, she maintained that the measures were temporary, aimed at accommodating extraordinary liquidity requirements of the banking system and “should not be construed as a change in the monetary policy stance”.

Ms Akhtar said the SBP was working with banks and was aware of the situation.

“The liquidity shortage is not because of what is happening in US banks and other countries.”

She said the problems here had local reasons. Withdrawals made by depositors had started coming back into the system, she added.

The governor also blamed excessive government borrowing for credit problems.

The meltdown in the US and Europe has cast shadows the world over, but the governor expressed confidence in Pakistani banking system. “Our banking is on sound footing and quite capable of facing shocks.”

The governor restricted the press briefing to the liquidity issue. She said the central bank had also been providing temporary liquidity through open market operations (OMOs). About Rs300 billion were injected through OMOs.

The governor said the inter-bank money rate, which was 30 per cent on Oct 4, fell to 16 per cent on Oct 16 because of the central bank’s decisions on liquidity generation.

“The State Bank will monitor the liquidity flow after the injection of massive liquidity into the banking system,” she said. “We want to be assured that liquidity is being effectively utilised.”

She said massive liquidity would be required for commodity operations, which would be at their peak next month. She advised banks to maintain an advance-to-deposit ratio of at least 70 per cent. The governor gave six months to all banks to bring the ratio up to 70 per cent.

She asked the media to be cautious in reporting about the liquidity ratio because panic could deal a body-blow to the sector.