The central bank on Friday kick-started injecting billions of rupees into the liquidity-scarce banking system, as economy observers are divided on whether or not the banks would revert to their primary job of generating economic activity in the country through extending advances to the private sector which they consider as the engine of growth in a developing economy like Pakistan.
The State Bank of Pakistan (SBP) Tuesday last reported that the newly-elected federal government had set a mammoth bank borrowing target of over Rs 1.7 trillion for 1QFY14. This is something the analysts deem a continuation of the previous PPP-led government’s policies that left the country breathing hard under heavy foreign and domestic debts.
The previous government, mostly during its five-year reign, had been under fire for creating what the analysts called it a cyclical debt circulating between the SBP, the risk-averse scheduled banks and the cash-strapped government.
Under the said cycle the State Bank, every week, used to provide the commercial banks with billions of rupees. The latter would lend these billions to the borrowing-prone federal government to be used for non-productive purposes like running of the government.
This Friday was not an exception with the SBP pumping over Rs 223 billion into the banking system that appears to be short of liquidity. Officials at the SBP say cash is injected through Open Market Operations when the money market faces liquidity crunch. The fresh injection of billions was made at an annual rate of return of 8.96 percent against seven-day maturities.
The funds-starved federal government of PML-N, which like its predecessors would be relying more on bank borrowings for budgetary support, would be raising Rs 300 billion and Rs 50 billion from the banks, respectively, on July 11 and 17 through auctioning t-bills and PIBs.
“This would of course lead to crowding out of the private sector,” warned Dr Shahihd Hasan Siddiqui. The economist said the role of banks in Pakistan had become very negative as they were going for investments in the risk-free government securities instead of increasing their advances to the private businesses.
Dr Siddiqui was equally critical of the role of the central bank which, he said, was lending huge sums to the scheduled banks to be invested in the risk-free treasury bonds. “If the State Bank stops handing theses billions to the banks they (banks) would certainly go to the private borrowers,” the economic viewed. According to official data, during FY13, from July 1 to June 21, the banks’ lending to the government was recorded in excess of Rs 1.3 trillion. Whereas the said period saw the private sector still maintaining a credit balance of Rs 1.8 billion with the banks.
The banks’ risk aversion could be gauged from the official figures according to which 77 percent of the total government securities were held by the scheduled banks. According to SBP, the resource-constrained government had auctioned sovereign guarantees, T-bills, PIBs and Ijara Sukuk, worth Rs 4.69 trillion as at May 31. Of this total, over Rs 3.60 trillion worth of government papers were bought by the banks.
The new PML-N government, Dr Siddiqui claimed, so far appeared to have been following the footsteps of the PPP rulers. “I don’t want to be pessimistic. If this government changed its path things would improve,” said he. On the other hand, some analysts believe that the banks may revert to the private sector given the huge decrease in the cost of borrowings by the SBP that in its recent monetary policy decision further slashed the discount rate at 9 percent.
“Though favoring investment in risk-free securities was a pre slash phenomena, we expect such a trend to alter if not completely reverse,” viewed Muniba Saeed, an analyst at InvestCap Research.
The analyst anticipates that the banks, in an attempt to seek returns where investment in government securities would be offering minimal return, are likely to revert back to the risk inherent advances.
“Having said that we expect banks to remain their cautious lending strategy at least until the economic and security outlook improves,” said Muniba who is expecting some economic revival as the banks go back to their core business of lending.
Amid such diverging views one must not forget the fact that the banks still are maintaining huge Non-Performing Loans (NPLs) that the SBP counted up to March 31 at Rs 630.4 billion or 4.73 percent of their total advances.
Leading banker Hussain Lawai opined that these bad debts happen to be the biggest challenge the banks are facing in Pakistan.
