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March 2, 2012

Pakistani banks going bankrupt slowly


Web Desk
March 2, 2012

ISLAMABAD: Pakistani banks have lent out half of their total assets directly or indirectly to the Government of Pakistan (GoP) — that’s a wholesome Rs4 trillion. And the GoP is in no shape and form to pay off all its liabilities. According to Moody’s Investors Service, one of the Big Three credit rating agencies on the face of the planet, “the banks high and increasing credit exposure to the government renders the banking system’s solvency increasingly susceptible to sovereign credit risk.”
To be certain, Pakistani banks’ direct exposure to the GoP is getting worse over time: In 2010, the banks’ direct exposure to the government stood at 295 percent of Tier 1 capital or 22 percent of total assets. In 2011, the same went up to 427 percent of Tier 1 capital or 32 percent of total assets.
The State Bank of Pakistan (SBP) maintains a comprehensive databank on ‘Financial Soundness Indicators’ of all banks under its jurisdiction. In 2008, when the PPP government took over, non-performing loans to loans stood at 10.5 percent.
By September 2011, the same had skyrocketed to 16.7 percent. Over the same period, non-performing loans have gone up from Rs359 billion to a colossal Rs613 billion — an increase of over 70 percent in three years.
In addition to direct exposure to the GoP, almost all banks have indirect exposure through advances to Public Sector Enterprises (PSEs). As of December 2011, this indirect exposure amounted to over 100 percent of Tier 1 capital or a hefty Rs700 billion. The Rs700 billion or a large percentage of it is never going to be paid back.
The other depressant, especially in public sector banks, is the cost/income ratio, which has gone up from 39 percent in 2008 to over 50 percent. The IMF expects that GoP’s budgetary deficit will hit 7 percent of GDP as oppose to the targeted 4.7 percent of GDP. And guess who will be financing that deficit? According to Moody’s, “Whilst the weak operating environment

faces further downside risks, increases in the banks’ exposures to the sovereign make the sector’s solvency increasingly vulnerable.”

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