For over 10 years now, banks have been overly cautious when it comes to transactions involving extension of bank loans. Their loans to the private sector have been constrained chiefly in light of the fact that the government has been the significant borrower. In a recent report by the State Bank of Pakistan (SBP), it has been stated that the bank loans summed up to PKR 5.571 trillion at the end of December 2016. The general increment in advances over the 12-month time frame was PKR 790 billion contrasted with the ascent of PKR 323 billion a year back.
Despite the fact that higher advances demonstrate more economic activity in the country, there hasn’t been such development through it. Economic activities are functional only in a few sectors such as construction cement, agriculture services, and auto industry. In addition, there has been very little growth in the manufacturing sector and exports have been continually declining.
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Largest Borrower
The government has been the largest borrower from the bank in the last ten years. According to the SBP quarterly report, the rise in the bank loans has been mainly for infrastructure development.
Rising advances mirror an imperative change in the banking industry. They demonstrate a lessened part of the legislature and expanded part of the private segment as a borrower. In any case, the real change is in the loaning approach embraced by the banks.
Pakistan Investment Bonds
According to research reports on banking industries, it was revealed that the main reason behind the increase in advances is low interest rates. Pakistan Investment Bonds (PIBs) is the main investment platform for banks as it has conveyed a double-digit return for almost two years. This return rate started to decrease as an effect of the decreasing interest rates in 2015 which was followed by a decline in inflation.
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As of now, the benchmark interest rates for bonds is 5.75 percent while the coupon rate is 7 percent for three-year PIBs, 7.75 percent for five-year PIBs and 8.75 percent for 10-year ones.
It can be seen clearly that banks are now looking for a higher return through advances. It is estimated that banks will show low profits in 2016 as they have lowered their investments in the government sector.
Even though banks possess PIBs worth PKR 3 trillion, this amount is fundamentally lower than the investments they possessed one and a half year ago. Banks’ interests in treasury bills are practically equivalent to PKR 3 trillion. Since July 2016, the government has been retiring its debt from the private sector. SBP information demonstrates government loaning from banks amid the initial six months of the current financial year is negative PKR 312 billion.
Source: Dawn
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