SBP sees rising government borrowing from commercial banks

KARACHI: The central bank on Wednesday expects government borrowing from commercial banks to rise in the near term due to the challenges it face in tackling an incipient economic recovery.
“ … The government continues to make efforts towards fiscal consolidation and raise external resources,” the bank said in its quarterly report on the performance of the banking sector. “(But) recent floods, security related expenditures, issues on the taxation front, and cap on government borrowing from SBP under IMF’s EFF program may induce government to meet its financing need through commercial banks.”
The State bank of Pakistan said the government borrowed Rs1.322 trillion during the second quarter of current calendar year of 2015 as compared to Rs719 billion in the same quarter of the last year.
It said the profit after tax of the banking sector surged by 52 percent to Rs99 billion on the back of both interest and non-interest income.
“Banks reported a gross profit of Rs74 billion in April-June 2014,” it added. “Accordingly, Return on Assets increased to 2.7 percent in Jun-15 from 2.1 percent in Jun-14.”
The SBP said policy rate cut during this year will impact the interest income of banks but huge stock of long-term bonds accumulated prior to rate cut and corresponding capital gain on such securities are expected to shield the profitability of the banking system in the upcoming quarters.
“During the quarter, asset base of the banking sector grew by 5.7 percent compared to 3.4 percent in the corresponding period last year,” the bank said. “Most of the increase in assets resulted from growth in public sector credit for matching the fiscal needs and financing commodity operations.”
The report said financing to private sector remained subdued despite the current environment of low interest rates. “During Jun-15, private sector advances grew by around 1.8 percent largely due to uptake in agribusiness, cement, chemical and pharmaceuticals sectors coupled with a 7.5 percent growth (PKR 22 billion) in consumer finance,” it added.
Increase in consumer financing was primarily contributed by personal loans and auto loans
Net retirement by various economic sectors, like textile, food and beverages and sugar partially offset the growth in private sector lending. “Textile sector, which is the largest borrower of the banking sector observed net retirement not only in quarter under review but also during FY15, primarily, due to restrained domestic and international demand,’ the report said.
The report said non-performing loans increased by 1.6 percent to Rs 630 billion during Jun-15, however non-performing loans to gross loans ratio still decreased by 39 bps to 12.4 percent and net NPLs to net loans decreased by 18 bps to 2.7 percent during April to June 2015.
On the funding side, steady growth in deposit base continued to provide the needed resources for financing asset growth. ‘With a healthy increase of 7.9 percent over the quarter, banks’ deposits reached 9.97 trillion in Jun-15,” the report said.
The report said the asset base of the banking sector is expected to remain subdued in line with seasonal slowdown in domestic credit in private sector driven by seasonal net retirements in textile and sugar sectors and recent dip in commodity prices.
“Some improvement in energy supplies and reduction in policy rate by 250 bps during this year is expected to provide some boost to overall lending activity,” it said.
The recent resurge in fixed investment credit may compel banks to focus on the collection of fixed deposits going forward while current and saving deposits are expected to follow the cyclical path.
“While solvency of the system is robust, banks need to make efforts for improving the capital base for enhancing their resilience and ensuring compliance with the regulatory requirements,” it said.