SBP asks banks and DFIs to submit weekly report of investment in shares and badla market

KARACHI (August 16 2003) : The State Bank of Pakistan (SBP) on Friday asked all banks and development finance institutions (DFIs) to provide weekly details of their investment in shares and lending of funds for carryover or badla financing.

The SBP issued a letter to all banks and development financial institutions to provide information on investment/exposure taken in quoted shares.

The central bank wants that banks should provide details on weekly basis with effect from August 16, 2003.

These institutions should provide weekly position by August 19.

The institutions to provide investment in quoted shares such as outright purchases, repos-other than (carryover) badla.

Moreover, the banks should provide badla financing position.

They should also provide list of stock brokers to whom badla financing of Rs 10 million and above had been provided along with the outstanding amount of financing.

According to a seasoned trader, the step taken by the central bank is a tough one but would check the immense flow of liquidity into the capital bourses.

He said that several institutions have been lending money to stock brokers to play in the badla market where the returns are as much as 15 percent whereas they are getting money at cheaper rates.

“Several companies during the recent bullish rally have recorded galloping increment while their revenues showed modest rise which indicates that availability of cheaper finance jacks up the prices,” he said.

A leading analyst said that the central bank took this measure so that in future if the market reached its optimum level, say above 5000 points, because of low interest scenario, institutions, in order to make capital gains might sell their holdings and the market started to move down substantially, experts might hold it responsible for not taking any timely action.

Cut in treasury bills rates and decline in Pakistan Investment Bonds yields have diverted the funds towards stocks.

Following heavy exposure and investment in quoted shares, the bankers were of the view that this circular was an indicator that the central bank wanted to impose an effective supervision onto their stocks related activities.

While most of the banks are fairly within the limits of their maximum exposures in terms of stock investing, the badla financing/carry-over transactions are generally tied with banks' excess liquidity position as well as the attractiveness of the badla market.

Moreover, some of the analysts were of the view that these are early signs of central bank's assuming role in bringing margin financing into the system.

In terms of market implications of this circular, the investors are expecting that financial institutions will become very conservative in their participation in the badla market.

“We do not expect a major impact of this development on the stock market as this is just a step to increase the scope of monitoring by the SBP,” said Zaheeruddin Khalid, head of research at Elixir Securities.

This weekly disclosure may also help the SBP to monitor banks' exposure to the equity market under the proposed prudential regulation restricting exposure to the stock market.

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