SBP provides Rs3.37tr to banks
The Central Bank of Pakistan has provided record funding worth Rs 3.37 trillion to banks for a period of seven days to address short-term liquidity crunch in the financial market, as demand for funding government is currently high, bankers told The Express Tribune.
The State Bank of Pakistan (SBP) injected a record amount of more than 3 trillion rupees for seven days for the second time on Friday in the past three weeks through its open market operations (OMO) . Rs 3 trillion is currently equivalent to 15% of total deposits in banks, according to central bank data available as of March 24, 2008.
“The central bank lends indirectly to the government through commercial banks,” said a banker on condition of anonymity.
The central bank has closed its doors to the government for borrowing directly from it under the International Monetary Fund (IMF) conditions for the $6 billion loan program and through recent bank rule changes power stations. Therefore, the central bank lends to commercial banks and these additionally provide the necessary funding to the government, he said.
The banks were facing a liquidity crunch after lending a significant amount to the government by buying short-term government security papers like three- to 12-month Treasury bills, he said.
Sometimes, commercial banks also borrow from the central bank in advance through OMO (injection) keeping in mind the demand outlook for government funds, he said.
“The rate of borrowing through OMO (injection) is low compared to the rate at which commercial banks invest their funds in treasury bills,” another banker said.
The break suggests that the central bank also injected liquidity worth 283.65 billion rupees to Sharia-compliant banks on Friday after quite a long period.
Lily SBP raises its interest rate to 12.25%
“This is the second time the central bank has injected funds into Islamic banks since the service became available to us since December 2021,” said Ahmed Ali Siddiqui, SEVP of Meezan Bank and Head of Shariah Compliance.
Islamic banks have faced a shortage of short-term liquidity after lending money to the government by buying Sukuks (Islamic bonds) from rulers in the recent past, he said.
“Islamic banks have purchased Sukuks worth Rs 478 billion in the last three months,” he said, adding that they had provided the necessary funds to the government at a price significantly lower than commercial banks.
The central bank holds short-term OMO (injection) trades for one day, three days, seven days, or 21 days almost every week, but the size of the injections has grown rapidly over time.
Central bank data, available since March 24, 2008, suggests that the central bank made OMO (injection) of more than 3 trillion rupees for the first time on March 18, 2022. It injected the hefty amount of 3 080 billion rupees in conventional commercial banks. Friday.
Previously, large injection operations ranged between 1 and 2 trillion rupees. They were also in amounts well below 1 trillion rupees, typically.
Bankers and financial analysts have speculated that commercial banks borrowed from the central bank through OMO (injection) at a cheaper rate and invested the amount in short-term securities at a comparatively low rate. higher. On the other hand, depositors received a meager return on their deposits.
They said that the central bank frequently injects funds into the short-term market to avoid the financial crisis and to keep the key rate at a predetermined level, which is 12.25% currently. If the central bank avoids injecting money, the policy rate may increase beyond that decided by the monetary policy committee (MPC) of the central bank.