State Bank of Pakistan's bailout package worth Rs270 billion for banks to provide additional liquidity in the current financial crisis has done the trick. It has enabled banks to meet their liquidity shortfall and restore the customers' confidence.
In the last step of bailout programme for the banks the SBP further reduced the Cash Reserves Requirement (CRR) by 100bps to five per cent on November 1, 2008.
Other than the bailout package the central bank has also made some amendments to the Advance Deposit Ratio (ADR) and these amendments have enhanced the banks' existing lending capacity by Rs500 to Rs550 billion as the average of advance to deposit ratio has dropped from 75 to 57 per cent.
Banks were facing huge liquidity shortage for the last two months due to the tremendous withdrawal of cash from banks in the wake of default remorse, as a result an overnight rate reached a new peak of 40-48 per cent in the domestic market.
Therefore, keeping in view overall liquidity condition of the market, Governor, State Bank of Pakistan, Dr Shamshad Akhtar announced a relief package of Rs270 billion to bring out banks from the liquidity crunch.
To meet the banks' liquidity requirements SBP decided to take some new measures and provided some relief to the banks, and announced phase-wise reduction in CRR by four per cent, besides exempting time deposits of one year and above from Statutory Liquidity Requirements (SLR).
On October 17, SBP announced a cut of 200bps to six per cent in CRR for all deposits up to one-year maturity, as a result of this decrease of 200bps, an additional liquidity of about Rs60 billion was released into the system.
Earlier, the central bank was already reduced by 100bps in CRR on October 11 with an injection of Rs30 billion in the banking system, while as communicated earlier there will be another 100bps reduction on November 15, in CRR which will bring it down to five per cent and will add another Rs30 billion.
However, to provide more relief to the banks by injecting more liquidity in the banking system the SBP has decided to reduce the CRR by 100bps from November 1 instead of November 15.
The SBP on November 1 with the consultation of banks has issued a circular to the presidents and chief executive officers of all banks including Islamic banks referring to BSD circulars nos. 25 and 26 dated October 17 on the CRR issue.
The SBP has also instructed banks to ensure weekly average of CRR at five per cent (subject to daily minimum of four per cent) of total demand liabilities (including time deposits with tenure of less than one year). However time liabilities (including time deposits with tenure of one year and above) will not require any cash reserve.
The current mover of the central bank would inject a liquidity of Rs30 billion in the banking system easing them to meet their customers' demand, while cumulatively SBP's current and previous moves will have released liquidity of Rs270 billion in the banking system.
The CRR on October 10 stood at about nine per cent compared to five per cent on November 1, while four per cent cut in the CRR by the SBP in the last 20 days brought some Rs120 billion liquidity in the system.
In another measure SBP has already exempted the time deposits of one-year tenure and above from SLR, which injected liquidity of about Rs120 billion in the market.
Meanwhile, the SBP last Sunday also announced some relaxation in the Advance Deposit Ratio (ADR), which enhanced the existing lending capacity of the banking system by Rs500 to Rs550 billion as the average of advance to deposit ratio has dropped from 75 to 57 per cent. The new amendment in ADR would now allow banks to lend to priority areas such as commodity operation, power sector and lending to other banks.
Referring to some recent pressures on money market rates, the central bank said that these mainly pertained to seasonal factor of cash withdrawal for Eid festival.
In order to meet their expenditure requirements for Eid preparation, the depositors tend to withdraw large sums from the banks, creating a liquidity crunch for a few days after Eid.
The also said that liquidity situation, however, reversed in due course after Eid as the withdrawn funds ultimately retract to the banking system. However despite this the rising liquidity shortage compels the central bank to take measures to inject more liquidity into the banking system to overcome the crisis.
Meanwhile, in its communication with the Pakistan Banks Association (PBA), the State Bank has advised the banks to act prudently in sharing the liquidity in the system and ensure that call rates reflect the fundamentals in the money market.
While, the SBP on its part has injected regular liquidity in the financial system and since August 2008, conducted over 15 OMO injections and injected temporary liquidity in excess of Rs320 billion and banks have been facilitated effectively on discount window.
The central bank in tandem lowered the Cash Reserve Requirement (CRR) and Statutory Liquidity Requirement (SLR) to infuse almost Rs270 billion liquidity, which is more than
the withdrawal of deposits in the system.
The SBP also appealed to the public at large to cooperate and help in channeling liquidity within the formal system.
