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EDITORIAL: The banking sector’s financial health has improved in the three quarters of calendar year 2021, as revealed by the latest banking compendium numbers published by the SBP (State Bank of Pakistan). The total assets size of all banks increased by 15 percent to Rs 28.8 trillion in 9MCY21.

The prime increase is in investments (mainly in government securities) which are up 22 percent to Rs 14.6 trillion. The investment to deposits ratio is at 71 percent. Not long ago, in Dec 2019, this ratio was 56 percent. The growing domestic debt is largely being financed by the banking sector. This leaves little room for the private credit to grow. The advances to deposits ratio is down from 41 percent in December 2019 to 34 percent in September 2021.

However, this does not mean that advances have not grown in the last nine months. These are up by 11 percent to Rs 9.1 trillion. There’s an identical growth in deposits – up 11 percent to Rs 20.5 trillion. The composition of deposits has largely remained the same where time deposits have a limited share of 20 percent. The banks’ concentration is primarily in free of cost current accounts which at Rs 6.8 trillion are a one-third of total deposits. The remaining deposits are in saving accounts.

The foreign currency account growth, however, is a mere 7 percent. In advances, corporate sector’s loans are up 8 percent to Rs 6.9 trillion, and these constitute 70 percent of the total loans. The main growth driver is trade finance which is evident from high growth in international trade in rupee terms. It is up 14.5 percent to Rs 1.4 trillion, and the non-performance ratio is at 7 percent, the lowest.

Fixed investment loans have the highest share of 48 percent, and their infection ratio is at 9.3 percent. Relatively, higher non-performing loans (NPLs) are in working capital loans as 11.4 percent of Rs 2.2 trillion loans are infected. The loans to the SME sector have declined in the last nine months despite government’s and SBP’s enthusiasm to increase the footprint of SME borrowing.

The toll is down 7 percent to Rs 431 billion. SMEs’ share in total advances is a mere 4 percent, which is not even one percent of GDP (Gross Domestic Product). This is in sharp contrast to many emerging economies where the share of SME loans is in double digits. The infection ratio in SME loans is far higher than corporate sector—at 17.9 percent.

On the other hand, there is a decent jump in agriculture loans due to better crop prices and margins. The advances are up 15.8 percent to Rs 391 billion while infection ratio is down from 22.8 percent in December 2020 to 16.7 percent in September 2021. A higher number of loans in the agri sector are parked in commodity financing — quasi fiscal operations in some cases.

The toll is up 19 percent to Rs 990 billion with less than one percent of toxic assets. The top performer is the consumer sector — loan portfolio is up 21.5 percent to Rs 772 billion. The NPLs are lowest in this segment — at 4.1 percent which is less than half of the total loans average of 8.8 percent. Unlike the consumer boom of the 2000s, this time banks are more cautious and have built a more resilient portfolio.

Pakistani banks exhibit a marked preference towards auto loans as the asset is easier to repossess in case of default. Plus, the price of a second-hand vehicle is usually higher than at the value on which the loan was issued. Auto loans are up 30 percent in 9MCY21 to Rs 335 billion, and infection ratio is a mere 1.3 percent. The other area where banks’ interest is growing is mortgage finance – also up 30 percent to Rs 2,123 billion. That is still a ridiculously low number. Nonetheless, the push coming right from the PM’s office is slowly reflecting in numbers.

The overall loan portfolios of banks have done relatively well in the midst of the pandemic. There was fear of high defaults. But due to smart lockdowns by governments and SBP’s concessionary finance schemes to combat the financial impact on businesses the infection ratio is yet to reach double digits. Then the better foreign inflows and stimuli offered by the SBP and government have translated into decent deposits growth.

The real challenge is to improve advance to deposits ratio of banks, and for that the government must find other avenues than domestic banks to rely on its growing need for debt. A better option is to reduce the government debt.

Copyright Business Recorder, 2021

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