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Liquidity crisis deepens: banks asking top clients not to avail credit limits - Naveed Yaseen - 10-17-2008 09:23 AM
KARACHI (October 17 2008): A crisis of confidence has clouded the entire banking sector as banks have begun to ask their corporate clients not to avail their running finance limits. The liquidity crisis deepened on Thursday as reports about some corporates doing arbitrage deals were being checked out by banks wherein their clients had availed advances against sanctioned limits and deposited the same at higher rates in liquidity squeezed banks willing to pay 16.5 to 17 percent or more for one month term.
Against a drop of Rs 179 billion in deposits since July, State Bank of Pakistan (SBP) had injected Rs 31 billion through reduction of Credit Deposit Ratio (CRR) by one percent and Rs five billion subsequently by raising the limit on PIBs under Statutory Liquidity Ratio (SLR) from five to 10 percent. According to informed sources, the central bank has called in bankers, on Friday, to cross check the data on bank liquidity.
SBP Governor Dr Shamshad Akhtar, who is scheduled to return from Washington D.C. on Friday, is expected to receive the analysis on the liquidity crisis in order thereby to take steps towards injecting liquidity before the last day of the week, ie Saturday. The Chairman Securities and Exchange Commission of Pakistan, Razi-ur-Rahman Khan, has reportedly sought Rs 40 billion credit line for non-bank financial institutions from SBP.
Some seasoned bankers and businessmen say that they have never seen such a shortfall in credit availability as banks which were initially shy in lending to non-bank institutions, turned up after one another with two top network banks withdrawing credit lines and becoming risk averse despite no history of a default on interbank market.
The sudden panic withdrawal by customers has contributed to the crisis of confidence and knowledgeable sources feel that the liquidity gap has widened to Rs 225 billion or more. And, with every passing day, it is only widening. They strongly feel that the response from the authorities is too little and too late and, in case it is allowed to persist next week, the liquidity gap would cross Rs 300 billion.
It is pointed out that misjudgement by US authorities in allowing Lehman Brothers (a 158-year-old institution) to go to the wall set the ball rolling for the crisis and a one-week delay by US Congress to approve the rescue package has aggravated the malaise, hitting the real economy with auto sales plunging and now auto appliances and possibly impacting Christmas sales.
Fortunately, in Pakistan, the stock market crisis has only impacted the real estate sector. However the placement of floor on KSE has now adversely impacted mutual funds and liquidity shortage is pushing the leasing sector and development finance institutions and investment banks to the fringes. Last week, only four to five small banks and one or two large banks were faced with a liquidity crunch. Now the contagion is spreading and banks are cannibalising deposits in ever-increasing number.
Market players are pleading for a co-ordinated response from the government, SBP and SECP. All eyes are on the new Finance Advisor Shaukat Tarin to bring the Governor SBP Dr Shamshad Akhtar and Chairman SECP Razi Khan to the same fountain for liquidity to not just to ooze but flood through so that credit is not denied to agriculture, trade and industry.
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