KARACHI: The size of country’s financial system, in terms of assets, has exhibited robust growth, rising by 20 percent to Rs 9.2 trillion by June 2010, compared to December 2008 level of Rs 7.71 trillion, the State Bank of Pakistan (SBP) revealed in its Financial Stability Review 2009-10 released on Tuesday.
The Report was an assessment of financial stability in 2009 (CY09) and the first half of 2010 (H1-CY10) and evaluated the government’s role in enhancing development of the financial sector. It struck a cautious note in its appraisal of structural weaknesses in the economy.
The bank said that during CY2009 the banks’ Non-Performing Loans (NPLs), of significant concern to the banking sector, had ballooned by 24.2 percent to Rs 432 billion and risen by 6.4 percent to Rs 460 billion by end-June CY10. The report inferred that the stability of financial system was largely derived from the predominant position of the banking sector, as other components of the financial system grew at a more gradual pace. “Domestic banking sector assets constitute 73.2 percent of total financial system assets,” it noted.
It was also indicated that bank deposits, of inherent importance to maintaining financial stability, had grown by 13.5 percent in CY09, and 8.2 percent in H1-CY10, bringing total deposits in the banking system to Rs 5.1 trillion by end-June CY10.
“This bodes well for the prospect of financial stability, especially keeping in mind the easing deposits growth in CY08,” the Report said.
The report deduced that the growth was largely fuelled by growth in home remittances of 23.9 percent (in terms of dollars), steady economic recovery, and a substantial increase in government borrowing; a portion of which flows back into the banking system in the form of deposits. However, the central bank viewed structural weaknesses in revenue generation, significant rigidities in government spending and expansion in quasi-fiscal operations as fiscal burdens which were increasingly sustained by drawing on the financial system as major challenges.
It pointed out that the banks’ exposure to the government increased significantly during 2009 and in the first half of 2010, with particular stress placed on the power sector as ongoing issue of circular debt took hold, and an overall rise in lending to public sector enterprises and commodity finance. The report noted with concern that finding the government to be a captive client, the drive to boost lending to the government was impeding economic growth.
It was candidly observed that, “in the current circumstances, while it may be prudent for banks to tilt their loan and investment portfolio in favor of public sector to maximise profits in the short run and minimise risks, a long term strategy requires balanced allocation, in favor of the private sector, which is the main engine of growth and productivity.” At the moment, the flow of bank credit to the private sector was constricted and the basic objective of financial intermediation, efficient allocation of resources, was not being met, the report maintained, stressing the need to quickly reverse the trend.
On an important note, the SBP opined that healthy deposit growth bore testimony to the banks’ resilience to the competition from the National Savings Schemes (NSS), which generally offer a higher rate of return than bank deposits. It said the pace of deterioration in the quality of advances slowed down considerably as in CY09 non-performing loans (NPL) increased by 24.2 percent to Rs 432 billion and further by 6.4 percent to Rs 460 billion by end-June CY10. ‘Looking ahead, NPLs remain a key cause of concern for the banking sector,” it observed.
Rounding up, the report asserted that in contrast to volatility in global financial markets, the domestic financial system continued to strengthen, primarily due to a low level of integration with global financial markets and the ongoing reform process. It was hoped that domestic financial markets would continue to furnish requisite support to the financial system in its primary role of financial intermediation.
