Banking tycoons

The banking tycoons of Pakistan are benefiting from the fiscal slippages caused by government's inability to diversify its sources of borrowing as the it continues to heavily rely on borrowing from commercial banks offering them much lucrative rates and risk-free investment avenues. The situation is regarded as a matter of deep concern for country's central bank.
The statistics obtained from independent Karachi-based analysts, show that the overall after-tax profit of the banking sector showed a tremendous growth of over 42 percent on year-on-year to Rs 75.676 billion in first nine months of 2011. However, the Advances to Deposits Ratio (ADR) further declined during this period reflecting a disturbing shift in banks' primary role as financial intermediaries in society.
Government's relentless efforts for seeking funds from banking sector and its persistent failure to diversify its sources of borrowing have jointly resulted into a steep fall in Advances to Deposits Ratio (ADR) that fell from 60.6 percent at the start of 2011 to 56.5 percent by end-Sep 2011.
The continuous fall in ADR reflects a receding financial intermediation in the economy that rather demands from the banking sector to offer a robust stimulus to industrial sector to avoid the possibility of a complete economic meltdown.
Over the last two and half years, deteriorating asset quality on the one hand, has made banks cautious in lending to private sector and forced them to restrict only to higher quality borrowers or seasonal credit. On the other hand, government's increasing reliance on borrowing from commercial banks has slackened banks' appetite for private credit. These two factors alone have provided banks enough room to build upon their investment in government papers at the cost of continuous deterioration in ADR.
The severity of the situation is evident from the fact that ADR of banking sector was around 76 percent in September 2008 that has now come at 56.5 percent amid a steady swelling profitability. The profits earned by banking industry during the first nine months of the current year depict that banks are not constrained by the availability of funds in disbursing credit to resources-starved industrial and agricultural sectors. Nonetheless, banks in order to be risk-averse have been exploiting risk-free and safe and sound investment opportunities.
This attitude has severely hit the effectiveness of banks' role as financial intermediaries in the society. Banking industry sources say this situation has also perturbed the central bank but the central bank cannot forcefully restrain banks from investing in government papers. Hence, the financial regulator has been warning the federal government on it for the last two and half years.
Though the main profitability ratios, RoE and RoA have shown marked improvement on a YoY basis as well, in line with growth in profitability, there is nothing much to be adored for banks except a non-sustainable gain that shifts banks from its prime role of financial intermediation.