Commercial banks’ investment in the risk-free and heavily-weighted government securities ballooned to over Rs2.21 trillion by the end of August this year. This figure constitutes 71.5 per cent of total Rs3.1048 trillion government papers, including Pakistan Investment Bonds (PIBs), Market Treasury Bills (MTBs) and Ijara Sukuk held by scheduled banks and financers from non-bank corporate entities, according to central bank data.
Non-bank lenders
Non-bank lenders, including insurance companies, mutual funds and other corporate institutions, invested Rs886 billion or 28.5 per cent of the total amount in the risk-free government papers up to August 31, 2011. The SBP data shows that the government borrowed from the primary dealers to the tune of Rs2.23 trillion, Rs643.5 billion and Rs224.6 billion through the selling of MTBs, PIBs and Islamic bonds called Ijara Sukuk, respectively, by the above date. The 11 primary dealers appointed by the SBP for FY2012 include JS Bank, HBL, NBP, Faysal Bank, Standard Chartered (Pakistan), UBL, Citibank NA, NIB Bank, Pak Oman Investment Company, MCB Bank and Bank Alfalah Limited. The banks remained the biggest buyers of MTBs and Ijara Sukuk that they, respectively, acquired to the tune of Rs1.755 trillion, 78.5 per cent, and Rs201.5 billion, 89.7 per cent, of the total auctioned papers. Banks’ buying of PIBs accounted for Rs261.5 billion, 40.6 per cent, compared to Rs382 billion, 59.4 per cent, bought by non-bank corporate investors. Whereas the corporate dealers’ investment in the MTBs and Islamic bonds, respectively, accumulated to Rs 481 billion, 21.5 per cent, and Rs 23.1 billion, 10.3 per cent, according to SBP figures.
Primary responsibility
This means the commercial banks, sticking to their risk-averse behaviour, are prone to lend increasing amounts of money to federal and provincial governments instead of doing justice with their primary job which, according to analysts, is to finance the country’s trade and commerce. Given this risk-averse trend prevailing in the banking sector, some economic observers claim banks and other corporate entities have formed “cartels” to pocket huge interest incomes through investing in the heavily-weighted plus risk-free government securities. According to the state bank, during first quarter of FY12, federal and provincial governments’ borrowings form scheduled banks amounted to Rs230.180 billion, registering a mammoth increase of 1772 per cent or Rs217.884 billion when compared with Rs12.296 billion of July-September FY11. On the other hand, banks maintained a meager credit balance of Rs89.536 billion for the private sector during the period under review, show the SBP statistics. “Banks and other corporate players have formed cartels to mint substantial return on their lending to the government,” viewed Dr Shahid Hassan Siddiqui, a senior economist.
Compromising growth
Urging the need for banks to increase advances to the private sector, analysts warn that the prevalent situation might risk the federal government’s efforts, if any at all, to achieve the 4.2 per cent GDP growth targeted for the current financial year. “Three to four years back the banks’ advances ratio used to be 75 per cent of their total deposits, which now has reduced to 61 per cent only,” Dr Shahid recalled adding “This may cause decrease in GDP growth and industrial production.” Economic observers are also critical of the government for what they called “sucking entire liquidity” from the money market leaving less or no space for the private sector. “It means the bulk of funds available (with banks) are funding the government debt,” said AB Shahid. “Who would then finance commerce and trade,” asked the analyst saying banks were becoming “over risk-averse” and were denying loans to private borrowers on one pretext or another. Suggesting remedies, the analyst said the government would have to improve its corruption-ridden tax collection system that would enable it to repay external and internal loans. Besides, he said, the economic managers would also have to embark on a vigorous campaign to recover some Rs700 to Rs800 billion embezzled by corrupt bureaucrats and politicians over the years. “Only these (measures) would lower the risk perception” for Pakistan across the globe, the analyst said.
