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April 26, 2019

Moody’s terms treasury single account credit negative for banks

Business

April 26, 2019

KARACHI: Ratings agency Moody’s on Thursday predicted a corrosive impact of the proposed transfer of government banks’ deposits to the central bank on the banking system’s funding as well as profitability; although it said access of commercial banks to stable and growing funds might alleviate liquidity pressures.

The State Bank of Pakistan (SBP) is considering the introduction of a treasury single account (TSA) as part of the government’s agenda to reform public financial management.

Moody’s Investors Service said introduction of the TSA, which would reside at the SBP, would be credit negative for Pakistani banks.

“We also expect a TSA would reduce banks’ profitability,” Moody’s said. “Banks would no longer be able to benefit from floats from payment inefficiencies and delays, for instance, by investing in government securities that generate interest income,” Moody’s said in a report, referring to a TSA implementation that prompted foreign currency liquidity squeeze in Nigeria.

The ratings agency said replenishing the withdrawn deposits through costlier private sector deposits or repo funding from the SBP will likely increase banks’ funding costs slightly.

Moody’s said creation of a TSA would require the transfer of government deposits to the consolidated TSA at the SBP. “This would lead to the withdrawal of government deposits in commercial banks, which totalled Rs1.88 trillion ($13.3 billion), or 14% of total deposits as of 31 March and includes federal, provincial and local deposits, according to the SBP definition,” it added. “However, it is not yet clear which type of deposits fall within the scope of the TSA. Among our rated banks, National Bank of Pakistan (B3 negative, caa1), the largest public sector bank, would be most affected by a TSA given that government deposits comprised 29 percent of its total deposits at year-end 2018.”

Moody’s, however, bet on banking system’s strong funding and liquidity profile as well as access to a stable and growing deposit base that would mitigate the negative risks.

“The negative effect is likely to be offset by fees generated from processing transactions, but only partially because these potentially will be subject to a competitive bidding process,” it said.

The SBP assured all the stakeholders of taking them onboard and assessing the effect on the banking sector before making a decision.

Moody’s Investors Service said the TSA is a consolidated bank account through which the government transacts all receipts and payments. The TSA is an important tool for the efficient management and control of government liquidity because it provides a unified view of all available cash resources to the government and the demand on these resources, which in turn optimises government borrowing and reduces debt-servicing costs. It also facilitates better fiscal and monetary policy coordination. TSAs are currently in place in many developed and developing markets, including Latin American and African countries, the ratings agency added.

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