Overnight liquidity borrowing: SBP signals its penalty intent

RECORDER REPORT

KARACHI: Frowning upon the banks’ frequent recourse to central bank’s window to borrow overnight liquidity, the SBP has signalled that it will charge an extra 50 basis points (bps) from banks that approach  discount window above seven times in a quarter. This move expected to discourage weak banks and DFIs, which are extensively borrowing from the SBP and subsequently investing those funds in the purchase of government securities.

This practice has forced the SBP to inject over Rs 611 billion in the system under open market operation.  The SBP decision is also aimed at forcing bankers to step out for deposit mobilization instead of easy income through lending to the sovereign with no risk attached.

As part of monetary policy, the SBP has also decided to take certain measures to strengthen the liquidity management framework.

According to the SBP DMMD Circular No.20 of 2012, SBP Overnight Reverse Repo (Ceiling) rate has been reduced from 10.50 percent to 10.00 percent p.a. In addition, SBP Overnight Repo facility will be available at 7.00 percent and this will serve as the ‘Floor’ for the Interest Rate corridor as announced by the above referenced circular.

Therefore, with a width of 300bps, the Floor and Ceiling levels for the Interest Rate Corridor are 7.00 percent and 10.00 percent p.a., respectively, with effect from October 8, 2012.

In order to dissuade frequent accesses to the SBP Overnight Reverse Repo and Repo facilities, the SBP has also taken some steps. Eligible institutions have to pay some 50 bps above SBP Overnight Reverse Repo (Ceiling), if any institution accesses over 7 times during a quarter for this facility. It means, at the eight time in a quarter any eligible institution can use SBP Overnight Reverse Repo (Ceiling) facility at 10.50 percent for the remaining period of the quarter.

“In case an eligible institution accesses either of the above facilities more than 7 times during a given quarter, a spread of plus/minus 50bps will be applied over & above the applicable SBP Overnight Reverse Repo & Repo Rates respectively for the remainder of the same quarter,” the circular said. SBP also mentioned that for the current quarter, the 7 instances as mentioned above will be recorded from October 8, 2012.