The funds-starved federal government whereas has put the risk-free sovereign guarantees on sale the commercial banks are the ones who hold much of the heavily-weighted papers that are adding huge sums to the latter’s profits.
Official data reveal that the auctioning of government papers by the cash-strapped government has crossed the Rs 4 trillion mark up to the month of August.
Ironically, whereas the banks find huge sums available with them to be invested in the government securities the central bank still fears a possible liquidity crunch in the rupee market and is, therefore, frequently injecting billions in the banking system almost every week. Monday too saw the regulator pumping into the money market Rs 562 billion at 9.71 percent rate of return.
On the other hand, the central bank Monday reported that the scheduled banks and non-bank corporate entities lent over Rs 4.224 trillion to the resource-constrained government through buying Market Treasury Bills (MTBs), Pakistan Investment Bonds (PIBs) and Ijara Sukuk up to 31st August (2012).
And much of the government papers, 70.5 percent, were purchased by the risk-averse banks which, however, are meant to extend loans to the private sector which is considered to be the engine of growth world over. To allow it cater its ever-burgeoning budgetary needs, the banks lent the government over Rs 2.978 trillion through purchasing the papers.
The share of non-bank and corporate firms in the holding of government papers amounts to Rs 1.245 trillion. The non-bank corporate entities include insurance companies, mutual funds and other bodies from corporate sector. This accounts for 29.5 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 2.795 trillion, Rs 1.044 trillion and Rs 383.5 billion, respectively.
Of these, Rs 2.94 trillion (74.6 percent) of treasury bills, Rs 548.1 billion (52.5 percent) of PIBs and Rs 343.9 billion (89.7 percent) of Islamic bonds were bought by the banks. While the balance Rs 708.8 billion, Rs 496.8 billion and Rs 39.6 billion worth of t-bills, investment bonds and Ijara Sukuk were acquired by the non-bank entities.
This heavy investment in the sovereign guarantees is fetching billions of rupees for the country’s leading banks like Habib Bank, United Bank, MCB Bank and Allied Bank.
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 the banks’ ever-increasing net interest income to higher returns on advances as well as better yield on the heavily-weighted government securities.
As the banks adopt a risk-averse behavior, perceivably due to their rising bad debts or Non-Performing Loans, which have surged beyond Rs 6 billion in the so-called recessionary climate, the economic observers warn of poor growth prospect in the days ahead in the country’s already troubled economy.
The economists are concerned that whereas most of the economic indicators were setting in the red zone, sans current account thanks to booming worker remittances, the banks are not playing their due role in extending a helping hand to the economic mangers to revitalize the ailing economy.
The analysts as well as the central bank agree that this risk-averse trend in the banks’ loaning approach would continue until the government take serious steps to curtail its ever-widening budget deficit that makes the rulers borrow heavily from the banking system. “This is an unhealthy practice,” viewed an analyst adding that “The government should increase tax revenues, curtail its current expenditures and lessen its reliance on the commercial banks. Otherwise, it would be disastrous for the economy”.
Some accomplished bankers like Hussain Lawai, president and CEO of Summit Bank, proposes that the State Bank should limit the banks’ investment in the government securities at 25 percent at maximum.
