Banks were at the forefront of Pakistans private sector credit-led economic growth in the mid 2000s. Since 2008, however, a rocket-propelled rise in bad loans and risks of solvency has necessitated the lenders to change audiences to the relatively safer shores of government instruments.
Now the times are changing. The State Banks latest report card of the banking system for the quarter ending June 2010 has found that fresh delinquencies are decreasing with a sound provisioning-cover.
NPLs virtually remained the same versus an average quarterly increase of 9.7 percent since June 2008, with the banks provisioning-cover rising 20 basis points to around 73.2 percent in the period under review. Gross-infection ratio eased down to 12.9 percent from 13.1 percent in the previous quarter.
The banking sector is going through an informal consolidation as depositors converge toward the Big-5 banks. Deposits in the banking system grew by 7.4 percent, largely on the back of record high remittances from overseas Pakistani workers.
Growth in advances, though, was sluggish in comparison at 1.9 percent. Overall, the advance-to-deposit ratio decreased from 66.4 to 63 percent quarter on quarter, highlighting the banks reluctance to issue fresh loans.
Given the risky nature - from a bankers point of view - of the consumer sector and small and medium sized enterprises, lending in the private sector was diverted largely to the corporate sector, which saw a modest increase of 2.5 percent.
But anyone remotely following the countrys banking machinery would know bankers preference for the safer havens of government securities and inter-bank lending. The central banks review confirms the increase in primarily short-term government bonds, which comprised more than 71 percent of the total investment of Rs1916 billion.
Intra-industry confidence seemed to remain strong as banks lent aggressively to each other in the quarter under review. Lending to financial institutions saw an increase of 38.4 percent, keeping the treasury folks busy through the spring quarter.
In the absence of confidence on the economy, investments in government securities and inter-bank lending act as a hedging mechanism for banks that are already working hard towards improving asset quality.
All together, banks posted profits of Rs36 billion in the quarter, largely from interest payments from investments. Operating expenses were on the rise across the board, given high salaries and other cost pressures exerted by high inflation.
Its not as if the banking system in the country is without risks. While credit risk from the consumer sector was the major factor in the quarter under review, the liquidity position of the system increased and reliance on the regulator decreased to levels not witnessed since June 2009.
Yet, since the end of the quarter, floods caused significant devastation that is likely to have an impact on delinquencies and agri-sector credit is expected to come under strain.
Outlook for the sector remains strong as banks have shifted from quantity to quality in their assets.