KARACHI: The government has further slashed the cut-off yield on Pakistan Investment Bonds (PIBs) on Wednesday, but their risk-free charm continued to lure banks as they offered Rs152.2 billion to purchase the papers.
However, the government picked up only Rs36bn through the auction, significantly below the target of Rs50bn, the State Bank reported.
Government borrowing from commercial banks is already at record highs, crowding out the private sector in an environment of falling interest rate and low inflation.
The highest rate cut was seen in three-year PIBs as cut-off yield on the tenor was slashed by 44 basis points to 7.85 per cent from 8.29pc in the last auction held in March.
Cut-off yields on five- and 10-year PIBs were reduced by 32 and 16 basis points, respectively
The investors offered Rs78bn for the three-year PIBs but the government raised Rs27.2bn. However, the figure was still the highest out of the total realised amount of Rs36bn as the government raised Rs4bn and Rs3.8bn on five- and 10-year papers.
The interest rate has been in decline since November, and so has returns on PIBs. However, the investors, mostly banks, are still in love with the risk-free PIBs.
The interest rate has been reduced by 200 basis points since November. Further cut is expected as the main inflation, CPI, has been falling against the expectations and calculations of economic managers.
But despite steep fall in returns, the trend to invest in PIBs has not witnessed any change which indicates that the banks still don’t rely on the private sector.
The private sector could offer much higher interest than the government papers, but the risks involved in this business keep the banks away.
According to SBP’s ‘March Compendium’, banks’ 84pc investment was in the government papers, dominated by PIBs. Another report of the State Bank issued on Tuesday shows that the government has borrowed Rs1.247 trillion from scheduled banks since the start of this fiscal year.
The government also retired Rs564bn of the SBP during this period. The government borrowed Rs413bn from the central bank in the same period a year earlier.