Shifting borrowing needs to commercial banks

The auction of treasury bills conducted by the State Bank on 20th April says a lot about the fiscal imperatives of the government and the credit behaviour of the commercial banks. The eagerness of the banks for investment in the government paper was so intense that they offered to invest Rs 44.0 billion, Rs 258.3 billion and Rs 49.9 billion in treasury bills, maturing over a period of 3 months, 6 months and one year, respectively.
Out of the total amount of Rs 352.3 billion offered, government accepted Rs 16.91 billion for three months at a cut-off yield of 13.25 percent, Rs 168.2 billion for six months at a cut-off yield of 13.62 percent and Rs 47.5 billion for 12 months at a cut-off yield of 13.87 percent. The weighted average yield for 3 months was 13.25 percent, for 6 months 13.61 percent and for 12 months 13.83 percent. Yields on various tenors in the previous auction were also not much different from the one conducted on 20th April.
Although the conduct of the auction of treasury bills is generally treated as a mundane affair and not worthy of serious comment, yet the staggering amount of money involved in the above auction could be a reminder or a reflection of an abnormal situation in the financial circles. To start with, it may be mentioned that the government usually resorts to the sales of market treasury bills to meet its short-term needs for financing the budget deficit.
A larger sale would, therefore, be interpreted as increasing the difference between the revenues and expenditures of the government and vice versa, if all other things remain unchanged. Unfortunately, several factors have lately combined to force the government to rely increasingly on the commercial banks for its financing needs.
There has not been any worthwhile improvement in the revenue generation while current expenditures have risen steeply due to a variety of reasons during the current year. Even severe cuts in development spending have not enabled the government to contain the fiscal deficit within the projected limit. On the financing side, donors abroad are reluctant to disburse the promised amount while the government is under tremendous pressure from the IMF to stop borrowings from the State Bank, as these are highly inflationary.
It is also not easy to raise domestic non-bank borrowings because of high inflation and dwindling incomes of the households. Also, these borrowings are quite expensive. Finding no other plausible alternatives, government seems to have opted for a greater reliance on the commercial banks to meet its financial requirements.
However, such a strategy is not without a cost. The amount offered by the banks in excess of Rs 350 billion indicates their level of keenness to invest in risk-free assets, which can earn them a handsome guaranteed return of between 13.25 percent and 13.87 percent per annum. This also shows that though there was enough liquidity in the banking system, financial institutions were not prepared to take pains to extend advances to the private sector, which is the real force behind the growth of the economy.
A higher flow of credit towards the government is usually unable to generate enough economic activity and correspondingly curtails opportunities for the private sector to enter into new business or expand the existing enterprises. State Bank's latest quarterly report released about a fortnight ago had summed up the whole issue beforehand by saying that "we expect the government to continue shifting its borrowing needs to commercial banks. In our view, banks would be happy with this, as it reduces their risk-weighted assets.
The downside is that banks' appetite for private sector risk appears to have dried up, which is not a good omen for economic growth and employment generation. Commercial banks appear almost to have given up their role as financial intermediaries". We feel that there is nothing more that can be meaningfully added to the observations of the State Bank to highlight the pitfalls inherent in such a situation.
The problem is that while banks' credit behaviour is a kind of by-product and could be easily influenced, the issue of growing fiscal imbalance, which is the cause of such an untoward trajectory is hard to tackle due to obvious reasons. Hopefully, both the government and the leaders of the financial system would be aware of the negative implications of continuing with the present strategy and try to make amends in the coming months in the larger economic interest of the country.