Banks’ assets have increased by 7.7 percent to Rs 7.1 trillion in second quarter of the current fiscal year. This rise was driven by massive investment in government guarantees. However, credit risk posed a major challenge as fresh Non-Performing Loans (NPLs) aggregated to Rs 53.7 billion, while the bad loans ratio increased from 14 to 14.7 percent.
“Growth in total assets was triggered, primarily, by investments in government papers and seasonal credit requirements of the private sector due to soaring input prices,” said the SBP’s Quarterly Performance Review of the Banking System released on Tuesday. According to State Bank data, during July-May 07 FY11, central and scheduled banks lent over Rs 624.13 billion to the cash-strapped government against Rs 346 billion in the last corresponding period.
Of the total budgetary loans, the State Bank lent some Rs 213.283 billion, Rs 47.8 billion more than last year, while commercial banks invested over Rs 410.85 billion, Rs 230.3 billion more than FY10 in the government’s risk-free papers. These include Market Treasury Bills, Pakistan Investment Bonds and Ijara Sukuk.
According to Tuesday’s report, there had been growing evidence of banks’ flight towards quality as investments, mainly in government securities, constitute around 30.4 percent of banks’ assets compared with 19.3 percent in December 2008. “Return on government paper now accounts for 34.5 percent of banks’ gross mark-up/interest income, compared to 28.8 percent in December 2008.”
This, the report said, suggested that growth in government borrowings, in a rising interest rate scenario, had shored up the banks’ earnings. “The banks’ disturbingly diminishing role as financial intermediaries was evident from the Advances-to-Deposits ratio, which dropped from 76 percent in September 2008 to 61.4 percent in December 2010,” it said. The State Bank, in its report, saw “important implications” of the banks’ shift in asset mix from advances to investments in government papers.
“In the short run, lure of risk-free investments in government paper, coupled with high NPLs, reduced banks’ eagerness for extending private sector credit,” it warned. The report said that growth in banks’ assets, while in line with the established seasonal pattern of the fourth quarter, was particularly strong given the comparatively weak performance in the three quarters of 2010. It said that net investments, with an increase of 14.3 percent during the quarter, outpaced the subdued growth of 5.7 percent in net advances.
Within private sector credit, lending to textile and sugar industries accounted for two-thirds of the credit off-take worth Rs 196 billion. Meanwhile, deposits increased by 8.5 percent, the highest quarterly growth during the last three years, the Report added. Banks remained fairly liquid in the October-December quarter, propelled by a growing share of investments in government papers. Furthermore, banks’ capital adequacy ratio improved from 13.8 to 14 percent, the Report said.
According to the report, the stress tests showed that the banking system was resilient to shocks from challenging macroeconomic and business environment.
