State Bank of Pakistan

STATE BANK OF PAKISTAN
CONTENTS OF THE PRESENTATION

What is a State Bank? State Bank of Pakistan Core Functions of the Bank Banks 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)

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 Bankers 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
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
QUALITATIVE CONTROLS
Moral Persuasion Direct Action
Operations
Variable Reserve
Requirements
Credit Rationing Credit Targets
BANK 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.
OPEN 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.
VARIABLE 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
CREDIT RATIONING In times of emergencies, the State Bank is also empowered to place limits on the amount available for each application of loan.
CREDIT 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.
MORAL 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.
DIRECT 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.)
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State Bank of Pakistan

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STATE BANK OF PAKISTAN

CONTENTS OF THE PRESENTATION

WHAT IS A STATE BANK ?

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

the interest rates in a country.

currency; Legal Tender (Notes &Bills)

STATE BANK OF PAKISTAN

1956, with subsequent amendments.

TRADITIONAL FUNCTIONS: PRIMARY

TRADITIONAL FUNCTIONS: SECONDARY FUNCTIONS

CORE FUNCTIONS OF SBP

STATE BANK OF PAKISTAN

WHAT IS CREDIT CONTROL?

requirements of the economy in order to achieve specific objectives.

HOW SBP CONTROLS CREDIT?

OBJECTIVES OF CREDIT CONTROL

INSTRUMENTS OF CREDIT CONTROL

the commercial banks are carrying excess reserves with

PROHIBITIONS ON STATE BANK

To engage in trade or otherwise have a direct interest in any

To purchase its own shares or the shares of any other bank or

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

Act, to appoint deputy governors

deficits, tax collection, etc.)

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