Private sector lending likely to increase in coming months

KARACHI: The State Bank of Pakistan (SBP) has expressed the hope that bank lending to businesses will increase in the coming months because of low interest rates and improved energy supplies.
However, persistent low inflation – particularly commodity prices – may keep the financing need for the working capital subdued, it said.
According to the quarterly performance review of the banking sector for the third quarter of the current calendar year released on Wednesday, the central bank said that with the pickup in economic activity and the start of Rabi season of cotton harvesting and cane crushing, the demand for the bank loans from textiles and sugar sector will be on the rise, resulting in increase of advances next month.
The SBP’s review said that the public sector demand for credit remained strong during July-September 2015 quarter due to fiscal needs, while private sector advances witnessed nominal decline of 0.4 percent.
The gross advances of the banks declined to Rs4.536 trillion in July-September 2015 from Rs4.552 trillion in the previous quarter and Rs4.209 trillion in the same quarter of the last calendar year.
This slowdown in advances is attributed to retirement of loans by textiles and sugar sectors.
The report also said that well-aligned with the domestic credit cycle, deposits also declined by 2.6 percent. Banks; therefore, relied more on borrowings, which grew by 38 percent during the quarter.
The banks’ investments in government papers increased by 8.1 percent. The outstanding stocks of banks’ investment in the government securities as of September 30 stood at Rs6.760 trillion against Rs4.762 trillion in September 2014.
The report highlighted that the year-to-date (January-September) profit-after-tax of the banking sector was recorded at Rs148 billion, as against Rs163 billion during CY14.
Return on Assets (ROA) before tax has increased to 2.6 percent in September from 2.2 percent in September 2014. However, the likely adjustment on account of provisions against infected portfolio by the year-end may keep a check on further growth in profits.
The September quarter observed a marginal rise of 2.1 percent in the asset base of the banking sector.
On the soundness of the banking sector, the report said that the asset quality remained stable as nonperforming loans (NPLs) almost stayed unchanged at Rs630 billion. However, the NPLs to Loans Ratio (infection ratio) marginally increased from 12.4 percent in June 2014 to 12.5 percent in September 2015 on account of seasonal fall in advances.
Net NPLs to net loans ratio; however, declined to 2.5 percent from 2.7 percent in June 2015 due to rise in the accumulated provisioning against infected loans.
The solvency profile of the banking system further strengthened with Capital Adequacy Ratio (CAR) rising to 18.2 percent (17.2 percent as of June 2015). Importantly, the banking system is cushioned with high-level of capital that may be utilised in any exigency.
The SBP suggested that the banks’ profitability may improve in the time to come on account of sizeable markup income on high-level of investments, likely increase in the private sector advances and lower interest expense on deposits due to prevailing interest rate environment.
However, adjustments owing to provisions against bad debts by the year-end may limit the growth in profits.
The risks to the performance of banks largely emanate from their ability to generate low cost funds.
In order to finance the growth of both advances and investments in the coming quarter, the banks need to focus more on deposit mobilisation, it added.