WEB DESK: According to the latest Quarterly Performance Review (QPR) of the banking sector released by the State Bank, asset base of the banking sector registered a significant growth of 7.7 percent during April-June, 2016.
Of this, private sector advances grew by 4.0 percent compared to 2.1 percent in the same period of last year. Although there was a seasonal net retirement in textile and sugar sectors, the fall in credit to these sectors was more than offset by a strong financing demand from several other manufacturing sectors like transmission of energy, chemicals and pharmaceuticals.
Banks’ holding of government securities reached Rs 7.2 trillion as of June, 2016, representing a more than 90 percent share in total investment. During the quarter, banks invested a net amount of Rs 239.6 billion in PIBs and Rs 105.3 billion in market treasury bills, showing a growth of 6.6 percent and 4.1 percent, respectively. On the funding side, the deposit base grew by 6.8 percent or 10.6 percent on year on year basis to reach Rs 11 trillion as against the rise of 7.9 percent in the corresponding quarter and 13.6 percent on an annual basis.
Most of the growth in deposits came from non-remunerative current deposits (Rs 392 billion) followed by fixed deposits (Rs 82 billion) and saving deposits (Rs 44 billion). Profit after tax during the first half of 2016 declined by 5.4 percent to Rs 93.7 billion over the corresponding period of last year due mainly to a decline in interest both on advances and investment. While 30 banks posted profits, the number of loss-making banks increased to 5 during January-June, 2016.
Asset quality of the banking sector improved somewhat during April-June, 2016 as ratio of NPLs to loans declined to 11.1 percent from 11.7 percent at the end of March, 2016. Solvency of the banking system, however, continued to remain strong with Capital Adequacy Ratio (CAR) staying above 16.1 percent which is higher than the minimum local requirement and the international benchmark.
Although nothing could be said with certainty, some conjectures could be made about the trends for the next quarter. The demand for private sector credit is expected to be slack for the quarter July-September, 2016 due to retirement of commodity financing and working capital loans for textile and cement sectors. The rise in the stock of government securities will, nonetheless, depend primarily on the growth in revenues and the availability of finance from abroad and non-banking sources.
The decline in interest rate on bank deposits and NSS may induce savers to shift their deposits to capital market and other avenues, thereby increasing the reliance of the government on banking sources for financing its deficit. Continued increase in investment in government paper may further strengthen the already comfortable liquidity position of the banking system. Deposits of banks may be influenced by Eid-related withdrawals and slowing remittances from abroad. Profitability of banking sector may remain in check in an environment of low interest rates earned on both public and private debt. Solvency of the banking sector is not likely to be threatened due to concentration of liabilities in non-remunerative deposits and high concentration of banks’ assets in sovereign debt like PIBs and MTBs.
This does not mean, however, that everything is hunky-dory in the banking system. Its biggest fault line is its gradual withdrawal from its real job of financial intermediation and undue dependence on investment in government securities to make profits. Although SBP has been advising banks to mobilise higher levels of deposits from the households and invest a large part of their resources in the private sector, the situation remains the same and this is not good for the overall development of the financial sector or the economy.
Secondly, the rate of return offered by banks to the depositors is generally low which is not conducive for prospects of a saving culture in the country. The decline in the profitability of banks may accentuate this trend further and harm the economy. And finally, most of the branches of banks continue to be concentrated in urban areas while rural areas, particularly the unbanked areas, continue to be deprived of banking facilities. Spreading of banking branches to unbanked areas will not only promote saving habit in these areas but would also increase the access of rural population to bank credit.
Source: Business Recorder