. .



1_popup_home.gif (1391 bytes) f&m.gif (7233 bytes)

Changes in SLR and CRR requirements

  1. Decline in world cotton prices
  2. WAPDA Bonds
  3. SECP launched to cleanse corporate sector
  4. Why tax on reserves of corporates?
  5. Ban on prize schemes
  6. Changes in SLR and CRR requirements

Interbank lending rates are expected to move upward

By SHABBIR H. KAZMI
July 19 - 25, 1999

State Bank of Pakistan (SBP) has raised the Cash Reserve Requirement (CRR) and Statutory Liquidity Requirement (SLR) for commercial banks. These requirements were lowered at the time of introduction of unified exchange rate. The new move is expected to cause an outflow of approximately Rs 15 billion and push interest rates upward

The CRR was revised upward from 3.5 per cent to 5 per cent whereas SLR was raised from 13 per cent to 15 per cent. News about the two changes spun the tenor market into action and rates exhibited an upward movement. One-month rates reached approximately 11 per cent by July 12 as opposed to 7.5 per cent a week earlier. Despite increased borrowing interest, lenders remained hesitant as they were uncertain about whether or not discounting will be witnessed. In case of discounting at large scale, rates are expected to rise even further.

There was also an SBP auction on July 12, which resulted in an outflow of Rs 2.28 billion from the banking system. This sum was borrowed against one year T-Bills and had a cut-off yield of 10.40 per cent. Bids for three and six months T-Bills were rejected. The auction did not have any effect on rates, due to the market, still being excessively, liquid. The rates remained low throughout the week, except towards the week end, when there was a slight increase due to banks looking to raise cash reserves to the specified level of 5 per cent.

The OMO conducted on July 17, saw an injection of Rs 4.75 billion. However, the market still remained short. Limited interest in longer tenors was witnessed for much of the week due to post OMO ambiguity. Tenor rates, however, registered a dip prior to OMO. This was due to the prevalent sentiment that the SBP would inject enough funds into the system to provide respite to a short market.

According to an analyst, the market was taken by surprise regarding the announced changes in the regulatory framework. Participants are as yet not clear about the direction of future yields on government instruments. The departure from current monetary policy of the central bank will be limited to the extent that yields on debt issue may register a slight upturn. Liquidity in the secondary market is expected to remain in surplus (consistent with recent SBP approach) as inflows start to build up in August.

The liquidity normally has an impact on the trading pattern and index movement. The week in review exhibited some interesting pattern. The KSE-100 index moved in a 5 per cent bandwidth and share price pattern remained highly erratic. There was very little consistency.

The trading pattern establishes what many securities analysts have been arguing for a long time — the medium term performance of the index remains closely linked to the fate of HUBCO. Most of these analysts agree that had the escalation of hostilities at the Line of Control not coincided with the escalation of tension between HUBCO and WAPDA, the index would definitely have been at another height.

Two fertilizer companies finally received the increase in feedstock gas price. These companies are expected to suffer limited damage on account of this increase. The greater threats to profitability are: the influence of cheap import and weak demand on account of poor farmer liquidity.

The government has asked the banks to phase-out prize schemes by December 31 this year. It is expected to have a negative impact on the deposits of these banks. With the reduction in return on National Savings Schemes, the savings are expected to move to capital market and real estate. However, no immediate and substantial inflow into these two sectors is expected, at least till the end of current year.

The banking sector analysts say that the impact of upward revision on CRR and SLR on the banks will be neutral or marginal at the best. In the absence of demand for funds by the private sector and quality borrowers from the public sector, financial institutions will continue to face surplus liquidity. However, it is required that the central bank should follow a consistent monetary policy.

LIQUIDITY FLOWS FOR JULY
(Rs in million)

Date

OMO

Auction

Coupon

Total

July 5

-

-

136

136

July 8

250

-

-

250

July 10

-

2,298

-

2,298

July 12

-

-

51

51

July 13

-

-

109

109

July 14

-

-

152

152

July 15

-

400

259

659

July 17

2,500

-

-

2,500

July 19

-

-

487

487

July 20

-

5,859

270

6,129

July 21

600

-

270

870

 

AVERAGE WEEKLY REPO RATES

DAYS

BID

OFFER

O/N

12.7

12.8

1-7

12.55

12.85

7-15

11

11.5

15-30

10.2

10.7

30-60

8.5

8.9

60-90

8.2

8.5

90-120

8.35

8.6

120-150

8.65

9

150-180

8.7

9