KARACHI: Banks increased their advances 144 per cent in 2016, a recent report by the State Bank of Pakistan (SBP) showed.
Banks remained cautious for more than a decade when it came to extending loans. Their advances to the private sector were limited mainly because the government was the major borrower.
The SBP report showed that the advances amounted to Rs5.571 trillion at the end of December 2016. The overall increase in advances over the 12-month period was Rs790 billion compared to the rise of Rs323bn a year ago.
Higher advances by banks indicate greater economic activity in the country. However, different reports by analysts as well as the SBP show economic activities are limited to a few sectors, like construction cement, auto, agriculture and services. Manufacturing is not showing significant growth as exports are still in decline.
For more than a decade, the government remained the single largest borrower from the banking industry, which hurt lending to the private sector. The SBP quarterly report mentioned the recent improvement in bank advances particularly for infrastructure projects.
Rising advances reflect a vital change in the banking industry. They indicate a reduced role of the government and increased role of the private sector as a borrower. However, the major change is in the lending approach adopted by banks.
Research reports on the banking industry have identified relatively low interest rates as the major reason for higher advances. The biggest investment avenue for banks was the Pakistan Investment Bonds (PIBs), which carried a double-digit return for at least two years. The return on PIBs started falling in mid-2015 as interest rates decreased following a decline in inflation.
The benchmark interest rate is now 5.75 per cent while the coupon rate is 7pc for three-year PIBs, 7.75pc for five-year PIBs and 8.75pc for 10-year PIBs.
This shows that banks are looking for a higher return through advances. Most banks are expected to show relatively lower profits in 2016 because of reduced profits on investing in government papers.
Banks still hold PIBs worth about Rs3tr, which is significantly lower than the investments they held one and a half years ago. Banks’ investments in short-term treasury bills are almost equal to Rs3tr. The government has been retiring its debt from the private sector since July 2016. SBP data shows government borrowing from scheduled banks during the first six months of the current fiscal year is negative Rs312bn.
Courtesy : Dawn News