STATE BANK OF PAKISTAN

CONTENTS OF THE PRESENTATION What is a State Bank? State Bank of Pakistan Core Functions of the Bank Bank’s Credit control and rotation Limitations to State Bank of Pakistan

WHAT IS A STATE BANK ? A state Bank is a bank which establishes the monetary and

banking structure of its state and works in the National Economic Interest.

Basically Issues Currency, regulates the money supply and controls the interest rates in a country.

Central banks oversee the commercial banking system of their respective countries

A central bank possesses a monopoly on printing the National currency; Legal Tender (Notes &Bills)

STATE BANK OF PAKISTAN The State Bank of Pakistan (S.B.P) is the Central bank of

Pakistan The State Bank of Pakistan operates according to

Pakistan Act 1956, with subsequent amendments.

FUNCTIONS OF S.B.P

TRADITIONAL FUNCTIONS: PRIMARY Issuance of Notes(Sole Authority) Conducting Monetary and Credit Policy Regulation of Financial System Lender of last Resort Banker’s Bank

TRADITIONAL FUNCTIONS: SECONDARY FUNCTIONS Public Debt Management Management of Foreign Exchange Advisor to Government Relations with International FIs

NON-TRADITIONAL FUNCTIONS Development of Banking System Training Facilities to Bankers Credit to Priority Sectors Islamization of Banking System

CORE FUNCTIONS OF SBP Regulation of Liquidity Ensuring the soundness of Financial System Regulation and Supervision Exchange Rate Management & BOP

HOW STATE BANK OF PAKISTAN CONTROLS CREDIT?

WHAT IS CREDIT CONTROL?

Credit control is the regulation of credit by the Central /State bank. The State Bank of Pakistan acts also as controller of credit. It tries to regulate money supply in accordance with the changing requirements of the

economy in order to achieve specific objectives.

HOW SBP CONTROLS CREDIT? A central bank control credit by manipulating the bank rate. If the central bank raise the bank rate to control credit, the market

discount rate and other lending rates in the market will go up. The cost of credit goes up and demand for credit goes down. As a result, the volume of bank loans and advances is curtailed. Thus raise in bank rate will contract credit.

OBJECTIVES OF CREDIT CONTROL The State Bank of Pakistan Act 1956 gives special powers to the State

Bank to regulate the volume and direction of bank loans in the country. The credit policy pursued by the State Bank aims at channelizing funds

of the commercial banks to productive sectors of the economy. It discourages the use of bank loans for non-productive purposes so as

to achieve prosperity, stability and the growth of domestic economy.

The long term objectives of the credit policy of the State Bank, however, is the promotion of high and stable level of employment in the country.

INSTRUMENTS OF CREDIT CONTROL

QUANTITATIVE

CONTROL Bank Rate Open Market

Operations Variable Reserve

Requirements Credit Rationing Credit Targets

QUALITATIVECONTROLS• Moral Persuasion• Direct Action

QUANTITATIVE CONTROLBANK RATE Bank rate is also called the discount rate. Bank rate is the official rate at which the State Bank

rediscounts the first class securities at its counter. The State Bank raises or lowers the discount rate from time to

time in accordance with the credit requirements of the Country. When the bank rate is raised, it is followed by an increase in the

discount rate of commercial banks. Borrowing is discouraged in the country and it eventually leads

to contraction of credit. A fall in the bank rate has the opposite effect.

QUANTITATIVE CONTROLOPEN MARKET OPERATIONS

By open market operation is meant the sale and purchase of government securities in the open market by the central bank of the country. The sale of securities leads to contraction of credit.

The State Bank of Pakistan, under section 17 of the Act, has been using this Weapon to regulate flow of the credit in the country. However, it has not been quite successful in controlling the volume of credit as the money market is not responsive in Pakistan the commercial banks are carrying excess reserves with

themselves and the marketable securities are inadequate.

QUANTITATIVE CONTROLVARIABLE RESERVE REQUIREMENTS The variable reserve requirement is an effective weapon of

credit control of the central bank of a country. Credit to private sector would be regulated through market

based instruments such as open market operation, discount rate, cash reserve requirements, etc. The power to change the minimum reserve rests with the State Bank.

The instrument of, variable reserve ratio, is used for affecting the liquidity position of the banks and hence their ability to finance. When the reserve requirements is raised by the Central Bank, it reduces the excess reserves of the commercial banks and thus restricts the expansion of credit in the country. When expansion of credit is required in the country, the Central Bank lowers the reserve ratio

QUANTITATIVE CONTROLCREDIT RATIONING

In times of emergencies, the State Bank is also empowered to place limits on the amount available for each application of loan.

QUANTITATIVE CONTROLCREDIT TARGETS

The Government of Pakistan set up National Credit Consultative Council (NCCC) in 1974. The functions of NCCC is to examine overall credit situation in the country and indicate the credit limits for the public and private enterprises. The State Bank of Pakistan sets specific target of funds to be given to agriculture ‘business’ industry and low cost housing by the commercial banks. If the commercial banks fail to achieve the ceilings, it imposes penalty on them. The defaulting commercial banks shall have to make interest free loan to the State Bank of the amount falling short of the target.

QUALITATIVE CONTROLSMORAL PERSUASION

If the commercial banks are advancing funds for speculative or non essential activities, the State Bank can persuade and directly appeal to them to follow the monetary rules and regulations laid down by the Bank.

QUALITATIVE CONTROLSDIRECT ACTION

If the commercial banks do not act upon the credit policy of the State Bank, it is then empowered to take action against them.

The State Bank is now more or less shielded from political pressure in making monetary decisions. It can now set and implement standards for commercial banks lending. It can also express its views independently. The Reform will create financial discipline in the economy.

PROHIBITIONS ON STATE BANK

To engage in trade or otherwise have a direct interest in any commercial, industrial or other undertaking except such interest as it may in any way acquire in the course of the satisfaction of any of its claims but also such interest shall be disposed of at the earliest possible moment

To purchase its own shares or the shares of any other bank or company or grant advances or loans upon the security of any such shares

To advance money on the mortgage or on the security of immovable property or documents of titles relating thereto

To become the owner of any immovable property except where ownership is necessary for the use of the bank

To make unsecured advances or loans

The govt. might also pressurize the sbp to force the commercial banks to dish out more personal loans to the public in order to meet their economic targets, especially near the elections.

To draw or accept bills payable otherwise than on demand

SBP management has no authority, under provisions of the SBP Act, to appoint deputy governors

SBP has no control over fiscal policy (budget process, fiscal deficits, tax collection, etc.)

THANK YOU