SBP tightens rule on banks' securities purchases

KARACHI (May 31 2006): The State Bank of Pakistan has issued a circular bringing clarity to the classification of securities under the investment portfolio ie “Held-for-Trading”, “Available for Sale” and “Held-to Maturity” based on its BSD circular No 7 dated May 30.

The Currency Market Associates (CMKA), in its report on the circular “Held to Maturity” has stated that the review should have been made earlier. The crux of the circular is as per international accounting standard and banking practice, which is more realistic. It will reflect a more realistic liquidity position of the market.

If you read the text of the circular, it clearly states that the SBP has found irregularities as banks and DFIs have shifted their risky portfolios to Held-to-Maturity category to avoid booking revaluation, whereas, good portfolios are held under remaining two categories. Hence, the central bank has clearly discouraged banks and DFIs from such practice. Such a move will bring about a clearer role of banks.

The report added that since overall holding by banks and DFIs is somewhere between Rs 75 billion and Rs 80 billion, net impact on the market will be around Rs 40 billion to Rs 45 billion against which liquidity was raised. The move also indicates stricter monitoring, which is in line with the central bank's tighter monetary policy stance.

The circular, which is to become effective from July 1, will provide banks ample time to adjust their positions. Once it becomes effective, in all the purchases of securities by banks and DFIs the category will be recorded (for which a purchase has been made) and the category will not be allowed to be changed. Therefore, clarity is to be sought at the time of purchase of security.

FOREX: The report on recent interbank foreign exchange market activity states that the current volatility in the Fx market has nothing to do with a shift in SBP policy stance.

The pressure on rupee was due to profit remittance by foreign banks, which was about USD 100 million. Another amount of roughly USD 50 million was paid against debt. This amount was in excess of daily routine trade-related transactions. At times the central bank provides necessary flexibility to banks to cover their commercial transactions, thereby reflecting the true nature of demand and supply based exchange rate.

The report further said that Fx interbank dealers have confirmed that the SBP was checking prices when the rupee hit October 20, 2004 lows of 60.37, but did not intervene. The rupee made sharp reversal. This also confirms that the market is net long in dollars, as the rupee closed at 60.22 on Tuesday.

Anther big move was seen in forward swap premium. Six-month swap premium fell to trade at 75 paisa, as rumours were circulating in the market that the central bank was doing buy/sell swaps to build its reserves. The market was caught wrong footed when the SBP in a surprise move entered the market in the afternoon, and instead, sold dollars against forward purchase, pushing six-month swap premium to 98 paisa. A rise of six-month premium by 23 paisa in a single day, which was closer to interest rate differential.

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