Banks Aren’t Lending Money to Govt Due to Low Policy Rate

Hoping for a rise in State Bank of Pakistan’s (SBP) policy rate, banks are holding back their money and are reluctant to lend money to the government for the current budget deficit issue. Banks are of the view that after Rupee’s devaluation, there should be an increase in policy rate.

The government, in an effort to bridge the gap between revenue and expenditure, borrows heavily from banks and financial institutes. For this, SBP was invited to bid for Market Treasury Bills (MTB) of 3, 6 and 12 month validity on Jan 17.

At this auction, banks only bid for 3 month MTBs. Overall, the banks bid a total of Rs. 1,118,737.1 million for 3 month MTBs. Out of this, the government accepted Rs. 1,065,737.1 million on face value and will be liable to pay an interest of Rs. 14494.025 million on these bills.

No bank or financial institute offered bids for the 6 and 12 month MTBs. A similar situation was also seen at the last MTB auction – held on Jan 3 2018 – with no banks or financial institutes bidding for 6 and 12 month MTBs.

Treasury market dealers told ProPakistani that the monetary policy of central bank is due this month. After the decline in Rupee’s value by 5 percent against US Dollar in December 2017, bankers are anticipating a rise in policy rate.

“SBP’s Policy rate is frozen at 5.75 percent since May 23 2016. This is the lowest policy rate in history with banks struggling to make profits in a low interest rate environment.” said the dealer.

After the devaluation, fuel price also increased, causing a significant impact on overall inflation in the country. The monetary policy is due this month and the case is clear for a hike in policy rate of at least 50 base points.