In confidential meeting, SBP warns banks at the request of the Ministry of Finance


CARACHI: A meeting was called at the State Bank of Pakistan (SBP) on Tuesday, where the top 8-10 banks were notified by the central bank at the request of the Ministry of Finance.

According to a source present at the meeting, the treasuries of the banks were summoned to the SBP after the Ministry of Finance expressed its dissatisfaction with the borrowing rates and the current exchange rate. The meeting discussed Bank’s participation in treasury bill (T-Bill) and Pakistan Investment Bond (PIB) auctions, and participation in money markets, after which SBP told banks to start bidding low at auctions and talked about the threat of the government imposing a super tax on fixed income in the event that banks do not lower yields.

Banks have also been warned about their foreign exchange (FX) activities. According to the sources present, the SBP told the banks to lower the exchange rate in the interbank even if it means incurring losses. The Central Bank told treasurers that this was a matter of national importance and that incurring losses was part of the privilege of running banking businesses.

The source explains that the SBP requires banks to sell dollars to customers without being allowed to buy them back on the interbank market. This exposes banks to changes in the exchange rate, which could also mean a potential loss of money for banks.

Additionally, the bank treasurers present at the meeting were warned that if the banks did not comply, the presidents of the banks would be called in for a one-on-one meeting for a “disguise” by the SBP.

Profit contacted the SBP for comment but was unable to get one before this story was filed.

Can the SBP do this, and what does it stand to gain?

The SBP acting at the request of the government raises questions about the autonomy of the central bank which must act without governmental or political pressure.

Intervening in the market because the Ministry of Finance is unhappy with the money and securities market is outside the mandate of the SBP, especially when it encourages the banks it regulates to suffer losses.

It is important to note that banks are privately owned and accountable to shareholders who do not expect the bank to deliberately engage in loss-making activities.

However, according to sources from the banks’ treasury departments, they agreed that banks incur foreign exchange losses from time to time when requested by the SBP. Therefore, the SBP asking them to do it again, can bear fruit.

Another source adds: ‘The business is run on a yearly basis so you have the opportunity to recoup some money. In the short term, selling short (trading and not having the opportunity to buy back in the interbank market) the USD is a negative trade, but it can be recovered during the year.

It is also important to note that the SBP and the government blame the banks for the depreciation of the rupee, despite the strict controls on foreign exchange.

“The SBP basically rations dollars. Banks send a list of payments to the central bank. They then select about 10% of the payments to be made. The rest is postponed. They control and ration. How can they claim that the market is responsible? explains the source.

However, in the case of treasury and GDP auctions, there is some ambiguity as to whether the SBP will be able to drive down yields. As the SBP cannot lend directly to the government, the government relies on borrowing from banks at auctions. The SBP, however, can indirectly lend to the government through OMOs (Open Market Operations).

In December 2021, when banks demanded higher yields while lending to the government, in anticipation of a hike in policy rates; the SBP injected liquidity via a 63-day OMO injection to calm markets and signal that the policy rate would remain unchanged for at least the next 63 days.

“This [asking banks to bring down yields] is not the way markets work. Unless the SBP and the Ministry of Finance can back it up with action, the markets will not react, as they did not respond earlier,” a source explained.

It is relevant to point out that the market has already informed the central bank of the restrictions on participation in bond auctions. Banks say they have no more room in their balance sheets for bonds financed by OMO loans. “With OMOs of around Rs 4 trillion, that’s as much debt-funded market risk as banks can take.”

If a super tax is imposed, banks are likely to bid after adjusting the tax. “Banks look at effective tax yields. If taxes go up, the banks will account for it,” says a source.

However, another source explains that it is not that simple and not listening to the SBP and the government is a tough call for the banks. “They can find all kinds of ways to hit the banks with fines. It’s a form of bullying,” a source said.

Another source says banks are likely to be compliant, especially banks hoping for a digital banking license. “They have influence over us, the banks desperately need the license, the government and the SBP desperately need control.”

The previous government threatened banks with lower yields. However, the SBP had to intervene by organizing OMOs to calm the markets. This did not yield desirable results.

A comment was requested from the SBP spokesperson, but no response was received prior to the filing of this report.

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