Flaws in treasury bill Tender — Bankers

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BANKERS this week denied snubbing the Reserve Bank of Zimbabwe (RBZ)’s maiden tender of US-dollar denominated treasury bills floated last Wednesday which failed to raise the targetted US$15 million.

Report by Clive Mphambela

Well-placed sources disclosed that the RBZ had taken the TB issue’s failure as a slap in the face and upon results of the tender last Friday, summoned banking sector executives to a meeting in which RBZ governor Gideon Gono and Finance minister Tendai Biti accused the bankers of hindering their efforts to bring back tradable paper onto the financial markets.

The authorities are now said to have raised the ante by mooting compulsory purchase of the instruments in future.

However, in various interviews with businessdigest this week, senior bankers revealed that they were not against the re-introduction of paper, but there were significant flaws with the inaugural treasury bill tender that needed to be ironed out before another one could be successfully floated.

“Whilst there were consultations held between the RBZ, treasury and market players, bankers were not given enough time to give feedback during the RBZ’s consultative process. The results of the tender, which should not be regarded as a failure of the market at this stage, is purely a result of inadequate consultations on the part of stakeholders before the issue,” a senior banker who declined to be named said.

The bankers said the design of the treasury bill was faulty, given that the paper is supposed to be free of default risk.

The bankers said the risk-free status of the bills was in question because of the government’s perceived poor creditworthiness at the moment, and its inability to print money.

“With the cash budgeting system, it is likely that in future funds may be unavailable to meet maturing instruments,” a bank executive said.

He added that the absence of a repurchase window for the bills at the RBZ meant the instruments were non re-discountable and could only be exchanged for cash on the interbank market, making them purely a secondary market instrument.

A senior treasury dealer with a major bank told businessdigest that the concept of averaging the tender rate and allotting bills at the average rate was unfair on market participants, as the approach ignored the particular needs of each of the participating banks and ultimately killed off enthusiasm in the instruments.

“When a bank tenders for the bills, it does so on the back of its particular circumstances, regarding its liquidity or underlying customer order book. By issuing bills at the average rate for all bidders, one can find that the bank will have lost money immediately on a market to market basis on any assets purchased, should the average rate be above the banks bid rate. A bank will also lose money should its average cost of funds be above the allotment rate. Going into the tender with such an unknown variable introduces an unacceptable trading risk for the bank,” the dealer said.

He argued the allotment of bills at an average rate defeated the whole purpose of tendering and the whole concept of the treasury bill rate becoming a benchmark market rate.

The whole idea of restricting the tender to participation by banks cuts out other potential investors such as pension funds and insurance companies which have large amounts of funds to invest.

“The TB tenders should be opened up to a wider audience as ultimately, the pension funds and asset managers are the ones that are mobilising longer term savings which can be channelled into Treasury Bills,” he said, adding that banks would maintain their agency role.

A senior RBZ official said the bankers had unfortunately sent the wrong signal to the authorities and this might result in a regulatory backlash.

“We had a meeting with the bankers following the failure of the inaugural TB tender and emotions were very high,” the official said. He said the authorities were clearly disappointed by the lack of support from the banks, given the huge cash piles that were sitting in bank vaults and in their RTGS accounts.

“It was pointed out at the meeting that one bank has been sitting on an average balance of US$67 million for over two years on their RTGS account and these are idle funds that are earning zero interest for the depositors. In addition, some banks are sitting on up to US$400 million in non-productive vault cash in notes. This is a serious situation that needs redress,” the RBZ official said.

“The same banks that are tendering for government treasury bills at ridiculously high rates of interest are sitting on huge customer deposits at zero percent and the powers that be will be forced to come up with interventions to correct the situation,” he warned.

Banks have come under fire for failing to pay significant interest on deposits and savings. This has been cited as the main cause of the slowing growth in savings in the economy despite low inflation levels. The bankers have previously blamed the absence of medium- and long-dated quality money market instruments for the absence of a vibrant secondary market and the lack of a visible market yield curve for interest rates.

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