Despite the economic slowdown and ever worsening law and order situation in the country, the cumulative advances of banking sector sample, consisting of 33 commercial banks, during 1HCY12 rose by an impressive seven percent as against Dec-11, said a report issued by InvestCap Research Monday.
According to the report, during the review period total advances of the country’s banking sector sample were seen to bolster on the back of exuberant loan disbursement by Big 5 tier, local mid tier and local lower tier banks, growing by 8 percent, 7 percent and 6 percent respectively.
In addition, it said, contribution of the foreign private banks tier was limited as their advances grew by mere one percent during 1HCY12. “In the absence of any details of advances, we assume the up tick witnessed was due to additional borrowings done primarily under the sub head of advances to power sector, due to ever growing quantum of circular debt coupled with loans disbursed to textile sector because of the export refinancing phenomenon,” said InvestCap analyst Asad I. Siddiqui. This assumption, Asad said, was based on figure of Dec-11 financial statments of our sample in which the above mentioned sectors had major contribution in advances. Conversely, financings (advances) of the Islamic banking tier contracted by 7 percent during the period under review (minor Rs10bn in monetary terms), which can be attributed to risk averse nature of their business.
With increasing advances, rise in non-performing loans (NPLs) had been witnessed as well, up by 3 percent. However, the rise under the said head was at a slower velocity as compared to rise in advances, suggesting the weak pace at which rolled over NPLs have been moving. As a result, net infection of our banking sector sample has also shrunk by minor 20bps, the net infection ratio at 5 percent during the period under consideration. Furthermore, impressive reduction of 130bps in the asset infection level of lower tier banks had been seen. However, the net infection ratio was still 1.8 times above than that of the banking sector sample, settling at 11.9 percent. It was more or less the same scenario existed with local mid tier banks, as their net asset infection was recorded at 8 percent during 1HCY12. This highlighted the fact that local mid tier and local lower tier banks have less access to advances of healthy nature. Due to the nature of our banking system, where virtually 50 percent of all the major heads of the banking sector rests with the big 5 tier, mid and smaller sized banks were forced to lend out at lesser rates to make themselves attractive and have more risky lending options as compared to the big 5 tier.
Continuous reduction in the discount rate coupled with saving deposits being fixed at 6 percent, investment in government’s papers was becoming less attractive with the passage of every monetary policy. This would leave banks with 2 alternatives: To shift focus towards core banking activities and go for the riskier option or to remain heavily invested in government securities and end up earning a lesser spread.
“In either case, we expect the Non-Performing Loans to rise by the end of the year, fueled by the non performance of freshly released advances,” said Asad.
Advancing woefully
