KARACHI, Nov 19: The State Bank on Wednesday significantly increased cut-off yield on treasury bills, which attracted much more liquidity than expected by it.

The benchmark 6-month T-bills rate was increased by 1.35 per cent to 14.01 per cent reflecting the recent increase in the policy discount rate.

Last week, the State Bank increased the discount rate by 200 basis points to 15 per cent that was termed as anti-growth measure by the analysts.

The banks were avoiding to invest in the T-bills mainly as desired by the State Bank and the main reason was the hope for higher interest rate resulting in higher cut-off yield in the wake of possible agreement with the IMF.

The government announced the agreement with the IMF last week, while the interest rate was increased prior to the announcement.

The banks have been taking cautious approach for lending their money as the impact of global financial crisis is being felt in every country, including Pakistan. The banks here stopped risky lending, which not only affected the consumer lending but also small banks, which partially depend on large banks for day-to-day business.

The State Bank sold T-bills worth Rs103 billion and the banks put most of their money for 3-month bills. They bought 3-month bills for Rs101.598 billion, while the remaining Rs1.869 billion went for 6-month treasury paper.

All bids for 12-month bills were rejected by the State Bank and the bids showed that banks were not interested to engage their liquidity for a period more than three months.

Bankers said another increase in the interest rate is possible, which means investing in T-bills of longer tenure would deprive them of the opportunity to earn more.

While making official announcement of agreement with the IMF, the adviser to the prime minister on finance said the interest rate might go up if the core inflation continues to rise.

Both the government and the State Bank argue that the policy discount rate was increased to bring the inflation (CPI 25pc, core inflation 18.3pc) down for the stabilisation of the economy.

Analysts and economist believe the high interest rate would reduce the flow of liquidity towards the market, which is also the aim of the State Bank, but at the same time lesser flow of liquidity will slowdown the economic growth, they added.

“The high rates of T-bills are a clear indication to banks to park their liquidity in the safest place with higher returns,” said an analyst adding that banks need no effort to earn good returns.

They are facing deposit mobilisation problem as their liquidity dried up during last couple of months, which forced them to offer higher rate of return to the depositors.

“Large Pakistani banks will get the real benefit of the higher yield as their average return is much less than the medium size banks and foreign banks,” said a senior banker.

The small banks are in deep trouble because they can not afford to offer rates as high as 16 per cent to their depositors as their average return on deposits is much higher than the five big banks.