Commercial banks are pocketing huge sums by investing in heavily-weighted government securities, accumulating around Rs4 trillion. According to State Bank data, scheduled banks and non-bank corporate investors purchased risk-free government papers including Market Treasury Bills (MTBs), Pakistan Investment Bonds (PIBs) and Ijara Sukuk to the tune of Rs3.815 trillion up to the 29th of last month. This heavy investment in sovereign guarantees is fetching handsome profits for risk-averse banks as four of the country’s leading banks, Habib Bank, United Bank, MCB Bank and Allied Bank, earned cumulatively Rs66 billion during 2011, up 27 per cent over 2010.
These four banks contribute over 50 per cent share of listed private banks’ deposits, and comprise 70 per cent of market capitalisation and represent approximately 60 per cent of the total branch network in Pakistan. To cater to their dire need for budgetary support, the cash-strapped federal and provincial governments raised over Rs2.750 trillion from scheduled banks, which the central bank said held 72 per cent of the total government securities auctioned. The government borrowed over Rs1.065 trillion from non-bank lenders including insurance companies, mutual funds and other corporate entities. This accounts for 27.9 per cent of total borrowings through the sale of government papers.
A break up shows that, as of February 29 (2012) the government, through the central bank’s Open Market Operations, auctioned MTBs, PIBs and Ijara Sukuk (Islamic bonds) worth Rs 2.634 trillion, Rs 898.9 billion and Rs 282.3 billion, respectively. Of these, banks bought treasury bills worth Rs2.035 trillion or 77 per cent, investment bonds of Rs 464.4 billion (52 per cent) and Islamic bonds of 251 billion (89 per cent). “Thanks to higher return on advances and better yield on government papers, overall net interest income of these four big banks grew by 17 per cent,” said Farhan Mahmood of Topline Research. As banks adopt risk-averse behaviour, perceivably, due to their rising Non-Performing Loans in the ongoing recessionary climate, economists foresee “disastrous” repercussions for the country’s ailing economy. 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 revitalise the troubled economy. “A major budget deficit is making the government borrow heavily from the commercial banks but this is an unhealthy practice,” viewed Dr Shahid Hussain Siddiqui. “The government should increase tax revenues, curtail the expenditures and lessen its reliance on the commercial banks. Otherwise, it would be disastrous for the economy,” the senior economist warned.
Experienced bankers like Hussain Lawai, presently serving Summit Bank as president and CEO, propose the State Bank to limit the banks’ investment in the government securities at 25 per cent at maximum.
