A painful paper cut! | Pakistan Today

A painful paper cut!

The cash-strapped government whereas has put the heavily-weighted sovereign guarantees on sale, the commercial banks are the ones to hold much of the risk-free papers that are adding huge sums to the latter’s profits. The funds-starved government auctioned government papers, including Market Treasury Bills (MTBs), Pakistan Investment Bonds (PIBs) and Ijara Sukuk, to the tune of almost Rs 4 trillion by the end of Fiscal Year 2011-12. According to central bank data, the scheduled banks and non-bank corporate investors purchased the government securities worth over Rs 3.95 trillion up to 30th June, 2012.
To cater to its ever-burgeoning budgetary needs, the resource-constrained federal and provincial governments borrowed over Rs 2.793 trillion through selling out government papers to the scheduled banks which, the State Bank said, held 71 percent of the total securities auctioned.
The government borrowed over Rs 1.156 trillion from the non-bank lenders including insurance companies, mutual funds and other corporate entities. This accounts for 29.3 percent of total borrowings through the sale of bonds. A break up shows that, the government, through the central bank’s Open Market Operations, auctioned MTBs, PIBs and Ijara Sukuk (Islamic bonds) worth Rs 2.59 trillion, Rs 974 billion and Rs 383 billion, respectively.
Of these, the banks bought treasury bills worth Rs 1.94 trillion (75 percent), investment bonds of Rs 510 billion (52 percent) and Islamic bonds of Rs 340 billion (89 percent). This heavy investment in the sovereign guarantees had cumulatively fetched around Rs 66 billion for the country’s four leading banks including Habib Bank, United Bank, MCB Bank and Allied Bank, during last fiscal year. This amount profit was up 27 percent over FY10. The above four banks contribute over 50 percent share of the listed private banks’ deposits, contribute 70 percent of the market capitalization and represent, approximately, 60 percent of the total branch network in Pakistan. The banking analysts attribute this growth in the banks’ net interest income to higher returns on advances and better yield on the heavily-weighted government papers. As the banks adopt a risk-averse behavior, perceivably due to their rising bad debts, called Non-Performing Loans in banking terms, in the ongoing recessionary climate, the economists foresee disastrous repercussions for the country’s ailing economy. The economic observers are concerned that whereas most of the economic indicators were setting in the red zone, the banks were not playing their due role in extending a helping hand to the economic mangers to revitalize the troubled economy. The analysts say this risk-averse trend would continue until the government take serious steps to curtail its ever-widening budget deficit that makes the government borrow heavily from the banking system.

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