Bank loans up by Rs69.6bn in April-June: Arbitrage against NSS
By Mohiuddin Aazim
KARACHI, Nov 6: Flooded with excess liquidity, all banks made fresh loans of Rs69.6 billion in April-June this year but failed to keep this fast-paced lending in the September quarter. Total stock of bank loans that stood at Rs973.5 billion at end-March 2003 soared to Rs1,043.1 billion crossing a trillion-rupee mark for the first time.
These figures relate to the domestic operations of all banks combined — and exclude the loans that their overseas branches made during this period. If those loans are also taken into account the total stock rises to Rs1,126.3 billion at end-June from Rs1,056.1 billion at end-March 2003, showing an increase of Rs70.2 billion in three months. But the contribution of the growth of loans made overseas was just negligible as compared to the growth in domestic loans — i.e. only Rs600 million. The remaining growth of Rs69.6 billion stemmed from domestic operations.
But bankers and officials of State Bank say banks could not keep this fast pace of fresh lending in July-September for a variety of reasons. Month end-figures of loans portfolios of banks are not available for the September quarter, but the figures based on weekly data give some clues. These figures available on SBP website show that the total stock of loans at the last weekend of September fell to about Rs1,051.2 billion from Rs1,069.3 billion, showing a decline of Rs18.2 billion. This indicates a reversal of the previous trend.
Total domestic loans of all banks combined had shot up from Rs1,002.4 billion at the last weekend of March to Rs1,069.3 billion at the last weekend of June 2003 showing a rise of Rs66.9 billion. But the falling trend recorded in overall loan portfolio does not mean the private sector credit offtake also remained stagnant. In fact the private sector credit expanded by Rs15.8 billion on the back of rising cotton prices and overall higher industrial activity.
A senior official of State Bank explained to Dawn that the figures for domestic loans as recorded at the month-end and those complied on weekly basis differed not only because of this difference in reporting period but also because the monthly figures were net of provisioning. This removes the confusion that the two sets of figures generate at the first sight.
ONE-TIME INCREASE: Making fresh bank loans of Rs69.6 billion and that too in the June quarter sounds surprising in Pakistan where the private sector borrows heavily between October-December and keeps retiring debts in the subsequent March, June and September quarters. So how the banks were able to make huge fresh loans in April-June this year. “The increase in loans emanated mainly from the non-traditional users, individuals, and puts into question the sustainability of the increase due to special circumstances surrounding it (arbitrage lending against DSCs /NSCs),” says a SBP report. “The increase came on the back of intense rate competition as a consequence of liquidity forcing the banks to under cut each other in the buyers’ market,” the report prepared by the SBP Banking Supervision Department adds. But the above statement in the report needs elaboration.
Since the banking system had been awash with excess liquidity, and matching demand for additional bank credit was not in sight, banks found a novel way of employing funds. They lent money to prime borrowers at 4-6 per cent markup against ordinary collaterals, and the borrowers used this money for buying Defence Saving Certificates and Special Saving Certificates. They then placed these zero-risk fixed income government saving certificates with the banks and secured more loans, this time at lower rates because of the quality of the collaterals-somewhere between 2-4 per cent.
This arbitrage lending helped banks earn a cool spread of at least two-per cent instead of sitting on idle money — and enabled the borrowers to build fortunes out of nothing. The racket kept going on until the SBP ordered banks to stop such lending in the middle of June. The SBP is still investing cases of arbitrage lending.
It is difficult to quantify such lendings but the SBP report does admit, though indirectly, that a major chunk of Rs69.6bn additional loans were made under this arrangement. Figures speak for themselves: Sector-wise distribution of bank credit in April-June shows a net increase of Rs18.5bn in consumer finance, the stock of which rose from Rs26.5bn at end-March to Rs45bn at end-June 2003.
Net credit expansion in remaining key sectors was negative: the stocks of corporate, SMEs and agricultural credit saw a fall of Rs12.6bn, Rs16.9bn and Rs1.6bn respectively.
