Oct 20 - 26, 2008

The banking system in Pakistan still less vulnerable as compared to other countries where the financial institutions were finding it difficult to overcome financial turmoil especially in the United States primarily due to a heavy fall of the sub-prime or mortgage system in that country. Dr. Shamshad Akhtar, Governor State Bank of Pakistan has made an earnest appeal to the media and other relevant quarters not to associate our financial system with the United States.

However, all was not fine as the banking system more or less was confronted with the liquidity problem especially on the back of heavy borrowings by the government and increasing demand for credit despite high interest rates. Taking advantage of the situation some unknown elements involved in rumor mongering were out to create a chaos like situation with a motive to shatter the confidence of the depositors by spreading rumors such as bankruptcy of some banks, freezing of foreign currency accounts and taking of lockers by the government. This was a criminal attempt by unknown quarters against the financial system of the country.

However, the central bank taking a prompt action has taken some immediate measures to allow smooth sailing in the banking system by injecting a package of Rs240 billion by November this year besides offering flexibility in CRR & SLR requirement which would help to improve adequate liquidity in the banking system.


At a hurriedly called briefing on Friday last, Dr. Shamshad Akhtar, Governor State Bank of Pakistan took the media into confidence and stated that SBP has been monitoring closely the recent developments regarding the overall and bank specific liquidity position. Keeping in view overall liquidity condition of the market, SBP has decided to take the following actions to ease the immediate liquidity situation and further incentivize banks to rely on medium / long term balance sheet funding w.e.f. from 18th October 2008.

* Cash Reserve Requirement (CRR) for all deposits up to one year maturity is being reduced by 200bps to 6.00 percent. As a result of this decrease of 200bps, an additional liquidity of about Rs60 billion will be released into the system. As communicated earlier there will be another 100bps reduction in CRR which will bring it down to 5.00 percent w.e.f. 15th November 2008 and will add another Rs 30 billion.

* It has been decided to fully exempt the time deposits of 1 year tenor and above from Statutory Liquidity Requirements (SLR). This will inject liquidity of about PKR 120 billion in the market.

* The reductions in CRR and exemption of Time Liabilities from SLR will release an aggregate liquidity of over Rs180 billion immediately into the system and contribute significantly in alleviating the prevalent liquidity strain in the market. In addition, another PKR 30 billion will be released on 15th November. Cumulatively SBP between now and 15th November, 2008 will have released liquidity of Rs 210 billion.

In order to ensure a prudent liquidity profile of the banking system, it has been decided to prescribe a maximum Advances to Deposit Ratio (ADR) of 70 percent for banks. However, in order to ensure the smooth transition of banks' balance sheet to this requirement, a timeline up to March 31, 2009 is being allowed to banks whose current ADR is above this ratio.

Pakistan's banking sector is quite resilient and fully capable of withstanding market shocks and adverse macro economic conditions. The lending and investments of the banks are subject to the stringent prudential regulations of SBP that prohibit the banks from clean lending above prescribed limit and investment in low quality assets.

State Bank of Pakistan is continuously monitoring the financial market in Pakistan and will take all necessary policy measures to ensure the stability of the payment and financial system in the country.

It is reiterated that these are temporary measures aimed at accommodating extraordinary liquidity requirements of the banking system and, therefore, should not be construed as a change in the monetary policy stance.

It may be recalled that SBP has also recently taken few other measures to improve liquidity position. These measures included the injection of fresh liquidity into the system through OMOs, reduction in Cash Reserve Requirement (CRR) by 1 percentage w.e.f. 11th October, allowing of HTM securities for discounting purposes, and an increase in the SLR eligibility limit of the PIBs from existing 5 percent to 10 percent of the TDL w.e.f 18th October, 2008.'