Commercial banks find few takers for excess money

LAHORE: Commercial banks are finding it hard to disburse excess cash in the market as private sector in Pakistan has discovered other sources to generate funds during the period the banks were riding high on high interest government borrowing.

A decade back, the interest rates were also very low, but the banking advances against their deposits were very high at 70-72 percent. When the interest rates started increasing, the advance to deposit ratio started declining, but the banks continued to make hefty profits as the high interest rate compensated for the lower credit uptake.

After 2008, the government became the largest and risk free borrower and the banks were not enthusiastic in lending to the private sector. The situation changed dramatically in the last two years with the decline in global commodity rates and very low oil prices, which resulted in government appetite for bank loans reducing substantially.

A decade back, the banks were also at liberty to offer any mark up to the saving depositors and there was a time when the larger banks paid zero mark up on saving accounts. As the interest rates started rising, the central bank made it mandatory for all banks to pay a minimum mark up to savers that increased or decreased with the up and down in policy rate. This measure also reduced the interest income of the banks, but at high interest rates it did not hurt them much.

Now the banks operate in a completely changed scenario, as businesses draw on their reserves and assets. Many businesses bought properties in Dubai and Europe due to unfeasible investing conditions during the long economic recession that started in 2007. The real estate sector was booming in those days. However, now real estate is under pressure in Dubai and the UK, while the economic conditions are getting better at home.

The availability of RLNG resolved the power crisis for the industries, and businessmen began liquidating assets for investments. The country imported machines worth $6.2 billion in the first nine months of this fiscal. This comes to around Rs650 billion at current dollar rate.

The private sector uptake of credit during this period was a little over Rs320 billion. General private sector invests 30 percent of the total cost of the project, while the rest in financed by banks. Almost 50 percent private sector credit uptake is for routine working capital. That leaves Rs120 billion for loans for machinery. This is around 20 percent of the total machine imports.

The bank deposits continue to rise as there is a natural growth of 4-6 percent due to average inflation and printing of bank notes. The bank deposits in March 2007, for instance, were Rs3,151,944 million while the advances were Rs2,385,242 million. In March 2013, total bank deposits increased to Rs6,776,747 million while the advances were Rs3,873,318 million. The deposits increased to Rs9,559,122 million in March 2016 while the total advances stood at Rs4,853,232 million.

It may be noted that the net unutilised deposits continued to increase with every passing year. These unutilised deposits are a burden on the banks as they have to pay interest on all saving deposits and high interest term deposits.

The five largest banks have somehow managed to shield themselves from interest payments to depositors by keeping term deposits portfolio to minimum and encouraging interest free current accounts. Still, even they have to pay substantial interest to saving depositors.

The rest of the banks that are smaller in size are not so well placed. They have a substantial portion of their deposits in the shape of term deposits. They have to pay high interest to the depositors and they need to generate income by providing credit to the private sector which is not picking up.

An example of the desperation of banks can be judged by the fact that in 2013 Wapda needed a loan of Rs40 billion for completion of some of its projects. All it could get from the consortium of banks was Rs20 billion. It had to float TFC worth Rs10 billion and raise Rs10 billion through Sukuk. In recent months it was able to raise a loan of Rs144 billion for Dasu from UBL-led bank. It got Rs25 billion working capital loan from a small bank at KIBOR minus 37bps -the largest loan approved by a single bank in Pakistan.