KARACHI, Oct 31: The bullish stock market is draining out some liquidity from the inter-bank market.

Senior bankers say and stock brokers confirm that the bull-run on the stock market in October drove scores of corporate as well as individual investors from the banks into the stock market. “I am sure this is happening,” said treasurer of a large local bank when Dawn asked him if people have been borrowing money from the banks to invest in the stock market.

But he said that the impact of this funds diversion is not too large on overall liquidity in the inter-bank market. He said that the liquidity shortage being experienced by the banks has more to do with the interest rate-cut expectations that had forced banks to over-invest surplus funds in T-bills.

The Karachi Stock Exchange 100-shares index gained 260 points in October rising from 2,018 on September 30 to 2,278 on October 31. This has not only resulted in shifting of some bank deposits into the stock market but both corporates as well as individuals are also borrowing from the banks to invest in the bullish stock market. That has been partly responsible for a serious liquidity shortage in the inter-bank market that had to borrow overnight funds of Rs216 billion from the SBP discount window in October to meet their daily cash requirements.

“The lively stock market has had a partial impact on liquidity levels in the inter-bank market,” said chief executive of BMA Capital Management Farrukh H. Khan. But he said primarily it was over-investment in treasury bills by the banks in anticipation of interest rate-cut that have kept the market short of liquidity for few months. He said diversion of funds from the banks towards the stock market might have taken place but that cannot affect the liquidity levels in the inter-bank market because eventually the diverted funds return to the system.

“The only reason (for the bullish stock market having a real impact on the inter-bank liquidity) is that people are borrowing (from banks) to invest in the stocks.” Khan said that has been happening to some extent as is evident from soaring Badla rates.

A former chairman of Karachi Stock Exchange Yasin Lakhani said that bank account holders particularly those in the fixed income group had been attracted by impressive returns on the blue chips.

He said the reason why funds are being diverted from the banks into the stock market is that the banks are offering very low return to depositors — less than 4 per cent on an average. He said he was not aware of incidence where corporates or individuals may have borrowed money from banks to invest in the stocks. “But funds diversion is certainly taking place.”

DISCOUNTING: Meanwhile, banks had to borrow Rs19.4 billion overnight funds from the State Bank on Thursday to meet their daily cash requirements. The borrowing made against approved securities at a fixed rate of 9 per cent took place despite an inflow of more than Rs29 billion through maturity of treasury bills.

This was the fourth discounting in a row. Earlier from Monday through Wednesday the banks kept borrowing overnight funds from the SBP to overcome the liquidity shortage.

The intensity of the crisis could be gauged from the fact that banks have borrowed Rs37.1 billion overnight funds from the SBP so far this week. Senior bankers say heavy discounting continued throughout the month of October and banks made a total overnight borrowing of Rs216.2 billion from the SBP.

Treasurers of local and foreign banks say one of the reasons for the market being short of liquidity is that until recently the banks were overinvesting surplus liquidity in treasury bills.

They say the demand for the private sector credit is low so they naturally have no option but to put surplus funds into T-bills. “But the problem is that most often banks have been over-investing in T-bills,” admitted treasurer of a local bank. “That ultimately leaves the market short of liquidity,” said treasurer of a local bank.

He said banks are over-investing surplus funds in anticipation of interest rate-cut. “The banks are doing this to avoid taking a hit on profits in case the State Bank lowers its discount rate and T-bills rate.”