Banks' investment in government debt up 25.67pc

KARACHI: Commercial banks have increased their investments in government debt almost by 25.67 percent to Rs7.019 trillion by February 2016 as the sluggish economy slow down demand from private sector.

The investment of commercial banks, mainly dominated in the government papers, has significantly increased to Rs7.019 trillion by end February as compared to Rs5.585 trillion in the same month of the last year, according to the State Bank of Pakistan (SBP) on Tuesday.

Analysts attributed the significant rise in investment by the banks in treasury papers to risk-free return. The analysts said that in the past the banks were shy in extending credit to the private sector due to various reasons, including low demand from the industry.

Other factors of low credit to the private sector included energy crisis, poor law and order situation and stagnant economic activities.

The analysts also attributed the rise in banks’ exposure in the government papers to the IMF condition on the authorities to restrain from the central bank borrowing.

The statistics show that investment to deposit ratio increased to 75 percent by the period under review as compared to 65.78 percent in the corresponding month of the last year.

The analysts said that around 70 percent of the local debt is maturing this year and of this 50 percent belongs to government papers. As per the latest auction target for the sale of government papers for the period March to May, the SBP will auction Market Treasury Bills (MTBs) worth Rs1,275 billion, of which Rs1,260 billion would be used as repayment for matured securities.

Similarly, the central bank has set the target for sale of Rs175 billion worth of Pakistan Investment Bonds (PIBs), of which Rs82 billion would be used for repayment.

Analysts said that the pattern will change in the next few months when banks would face reinvestment risk due to ease in the interest rates and advances to the private sector would increase.

Khurram Schahzad, an economic analyst said the banks would opt for extending loans to the private sector, owing to increased activities due to China-Pakistan Economic Corridor (CPEC).

The government had multiple external avenues to meet the budgetary financing, as it had already build up foreign exchange reserves through Euro Bond, sovereign bonds, remittances, Coalition Support Fund, etc, he said.

Total advances of the banks have increased by 8.71 percent to Rs4.83 trillion by February as compared to Rs4.443 trillion by the corresponding month of the last year.

As per the SBP monetary aggregates, the private sector credit off-take increased sharply by 100 percent to Rs318 billion during the first eight months of the current fiscal year from Rs159 billion in the corresponding months of the last fiscal year.

The SBP in its recently issued quarterly review mentioned that the government had estimated disbursements of Rs207 billion, around $2.1 billion, from China in the current fiscal year in which power and construction would be the prime recipients.

The deposits of the banking system increased by 10.54 percent to Rs9.385 trillion by February as compared to Rs8.49 trillion.

Ahsan Mehanti at Arif Habib Limited said the deposit base of the banking system showed that it had sufficient liquidity.

Mehanti said that ease in government borrowing and banks’ high deposits would create an opportunity for the private sector to borrow for their expansion and working capital requirement.—Originally published in The News