SBP review of sale, purchase deals: Increased FX income of banks driven by higher spread, Senate panel told

ISLAMABAD: The review of sale/purchase transactions of inspected banks suggested that the overall increase in foreign exchange income of banks was mainly driven by the higher spread charged by banks.

This was stated by the State Bank of Pakistan (SBP), in its brief submitted to the Senate Standing Committee on Finance, in response to the agenda item regarding the opening of LCs at the appreciated rate by banks.

The meeting was informed that based on the regular monitoring and complaints received from bank customers regarding higher margins in opening of LCs, the SBP carried out an assessment of a significant increase in FX income of banks in the first half of 2022.

The exchange rate – rupee against the US dollar – came under extreme pressure during May, June and July 2022 and the rupee hit an all-time low of Rs239.94 against the dollar on July 28, 2022. This extreme market volatility resulted in high-risk premiums in the form of high spreads charged by the banks especially on large value transactions.

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The weakening of rupee against the US dollar was mainly due to the delay in release of the International Monetary Fund (IMF) tranche, sharp depletion of foreign currency reserves, short supply/inflow of dollars in the market, global strengthening of the US dollar and high prices of energy products and political uncertainty.

The significant increase in foreign exchange income of the banks was mainly due to rise in daily volatility of exchange rate, which resulted in widening of the spreads charged by the banks.

Moreover, increase in income was also to some extent, due to increase in the volume of business.

Additionally, to facilitate the large import payments, the banks ran short position (uncovered foreign exchange exposure) and to cover the expected losses from running short position, they resorted to charging high, spreads/risk premium.

The meeting was informed that the review of sale, purchase transactions of inspected banks suggested that the overall income of banks was mainly driven by higher spread. This has been viewed seriously and the SBP has initiated enforcement action by issuing show-cause notices to the inspected banks.

After completion of due process, in the ongoing month, an appropriate action would be taken accordingly, added the SBP in its brief to the committee.

Copyright Business Recorder, 2022