Q.1 How does the State Bank of Pakistan control the banking system of the country?
Answer
In the following salient features of the State Bank of Pakistan to control the banking system are discussed which are mainly instruments used in Pakistan since all the conventional control techniques are not applicable in developing countries:
Bank rate
This is the rate at which the State Bank buys or discounts bills of exchange and other commercial papers. This is also the basic interest rate. All the other interest rates in the banking system, like the deposit rate paid by the banks to their depositors and the rates at which bank lend for short and long periods, are tied to it. With any change in the bank rate, similar changes take place in the entire interest rate structure of the banking system.
Cash Reserve Requirement
All scheduled banks are required to deposit a certain percentage of their total liquid assets with the State Bank. Technically, the government can bring about a change in reserve requirement but normally the State Bank exercises this authority on the government’s behalf. A rise in the cash reserve requirements restricts the bank’s lending operations while a fall can encourage them to advance more credit.
Selective Credit Control
The State Bank usually have considerable authority to control the composition of bank credit. SBP can direct banks regarding the distribution of credit between different sectors and uses, between long term and short-term loans, margin requirements for advances against certain types of assets and the interest to be charged on different types of advances and from different borrowers.
Credit Ceiling
A credit ceiling for the banking system as a whole or for each individual bank, can exercise some influence over the total volume of credit though not on its direction or use.
Liquidity Ratio
This is the ratio between a bank’s liquid resources and its total liabilities. While a low liquidity ratio may lower public confidence in the banking system and may also allow banks to liquidate their investments in government securities to finance credit expansion, a high ratio adversely affects the credit flow in the economy and the overall profitability of the bank.
Open market operations
This consists of the purchase and sale of securities by the State Bank in the open market. The quantity of cash in the money market increases with the purchase of securities whereas their sale has contra-dictionary effect.
Credit Quota
The State Bank can also limit its own lending to banks by fixing a credit quota for each bank and borrowing over and above the limit may carry a higher interest rate.
In Pakistan, in addition to these instruments, the State Bank of Pakistan also offers informal advice, guidance, and persuasion to banks in various matters. Such informal control may have become fairly important particularly after the nationalization of banks and the consequent unification of their operating policies.
