Bank credit rises on uptick in Pakistan economy

Credit and investments provided by banks rose in the first half of 2016 compared to the like period of 2015.

Commercial bank credit and bank investments are on the rise in Pakistan on the back of a significant uptick in the economy.

The new monetary policy and the benchmark discount rate, expected to be announced later this week, are likely to strengthen this trend.

International financial organisations, the ministry of finance and the State Bank of Pakistan (SBP), the central bank, report that the economy is in an expansionary mode and will continue to be so in the next two years.

"We expect gross domestic product [GDP] growth to rise further in fiscal year 2017. The actual GDP growth in fiscal year 2016 was 4.7 per cent - a record high for the last 12 years despite international challenges," say economists.

According to the SBP, the government envisages a higher GDP growth of 5.7 per cent in fy-17. The banking system will gain further strength and earn larger profits as economic growth increases.

The SBP issued a review of the country's macroeconomic performance, with a specific reference to the recent monetary policy which ensured a rapidly declining benchmark discount rate and the lowest interest rate of 5.25 per cent charged by commercial banks, a 42-year low.

Reforms
Finance Minister Ishaq Dar said: "All stakeholders are satisfied with the country's macroeconomic stability, but they should continue the reform process and pursue policies that will enhance and fast-track growth and include all sections of society, business and the economy."

Saeed Ahmed, acting governor of SBP, said: "The monetary performance remained satisfactory during the quarter ended June 2016. Forex reserves reached the highest level of $23 billion." It will expand exports and imports, which, in turn, will benefit banks, the financial, economic and industrial sectors.

All these stakeholders are upbeat on the economy's growth after positive reports from the International Monetary Fund (IMF), the World Bank and Manila-based Asian Development Bank.

The IMF said: "Pakistan's economy is growing at its quickest rate in eight years. Investor confidence has slowly returned to a country that was battered by the global financial crisis."

Bank investments are rising but deposits are not growing that much, reported the SBP. Credit and investments provided by banks rose in the first half of 2016 compared to the like period of 2015, it said.

"This was despite the fact that deposits saw a fall in growth in the same period. The banks provided additional funds for credit and investment from money they borrowed from SBP."

Liquidity crunch
The central bank injected Rs1.79 trillion on July 11 and Rs1.13 trillion on July 15 into banks to help overcome their liquidity crunch and expand credit to the private sector. One of the key causes of the commercial banks' liquidity crunch was "the borrowing by the government to cover its budgetary gap."

"Banks' deposit growth fell by almost 50 per cent in the first nine months from July to March of the previous fiscal year," the SBP reported.

In a report for the third quarter of fiscal year 2016, the SBP said private sector deposits increased by Rs149.4 billion during July-March, less than half the rise in deposits recorded in the like period of fy-15.

But the plus point is that banks' advances rose at an eight-year high of seven per cent in the first half of 2016 on the back of growing credit demand.

The banking sector advances-to-deposits ratio increased by 51 per cent in June 2016, up from 50 per cent in June 2015. At the same time, the investment-to-deposit ratio increased to 75 per cent in June 2016, up from 64 per cent in June 2015.

But the more alarming point is that the government's borrowing from commercial banks was Rs1.38 trillion from July 1, 2015 to June 24, 2016. It put a big squeeze on commercial banks' liquidity and ability to extend credit to the private business. In fact, the banks are hurt by a double squeeze: low deposits and low liquidity due to extensive and continued government borrowing. The two factors leave little cash with banks to lend to the private sector, which has a growing demand for working capital.

Investment banking suffers
While most indicators for the banking sector are positive, there is a problem. It relates to investment banking operations. The investment banks are slowly going out of business because they are unable to compete against the investment wings of big commercial banks which have larger amount of cash to play with.

A recent report by SBP on Pakistan's financial sector said "in the absence of funding sources from commercial banks and limited equity, investment banks have slowly been waning."

"The investment banking sector is unprofitable and has been operating on the sidelines owing to their inability to compete with the investment banking wings of commercial banks," added the report.

The SBP noted: "The commercial banks have adopted an aggressive investment policy and 88 per cent of their investments are concentrated in the government papers. The government's financial market regulator - the Security & Exchange Commission of Pakistan - has launched its non-bank financial institutions programme which is expected to help such institutions to overcome difficulties, including liquidity."

The writer is based in Islamabad. Views expressed are his own and do not reflect the newspaper's policy.