KARACHI, May 28: The government may lean on banks again to bridge the fiscal gap in the last month of 2012-13 which could push the monetary expansion further as it crossed 10.6 per cent on Tuesday.

Bankers said the government depends on borrowing particularly from the commercial banks and it was the reason that it raised Rs260 billion against the target of Rs200bn in the treasury bills last auction. As the maturity on the same date was Rs177bn actually additional Rs83bn were raised to close the fiscal gap.

According to another report of the State Bank, the fiscal deficit at the end of third quarter, July-March 2012-13, was Rs1.046 trillion while the revised target for the current year was Rs1.752tr.

Bankers said that June might see large outflows of liquidity towards the government from the banking system.

“There is no money available from foreign sources to reduce the fiscal gap. The required amount would mostly be generated from the banking system,” said a senior banker.

On Tuesday, the State Bank reported that the monetary expansion grew by 10.64pc or Rs813bn till May 17. This expansion is much higher than the same period of last year as the expansion grew by 9.58pc or Rs641bn.

The banking industry believes that the new government, which might be formed in the first week of June, would not be able to bring any vital change in this situation. They said that the new government also needs money to resolve severe problems like energy crisis and circular debt. The last quarter of this fiscal requires Rs700bn to meet the revised target of fiscal deficit of Rs1.752tr.

Since the main inflation has been declining for several months there is no fear of higher inflation due higher monetary expansion; however, the bankers believe the policy interest rate which is to be announced next month would not see any change.

“Further lowering of interest rate could trigger inflation as the bulk of liquidity is already flowing towards the government. If the private sector demand also jumps with lowering of interest rate, the inflation would see a rise and the new government would not take such a risk that has a political cost too,” said a senior banker.

The credit off take by the private sector has further fell to Rs82bn till May 17 which is only 35pc of what it was last year. During the ten and half month in FY-12 the private sector had borrowed Rs233bn.

While the government has no option but to borrow from the banking system, the banks also have no option other than investing into the government papers. They argue that lending to private sector in the existing low economic growth is of high risk.

They believe that non-performing loans (NPLs) may hit high again. According to State Bank’s another report the NPLs of all banks till 31st December 2012 was Rs607bn and it fell from Rs617bn at the end of September 2012. The banks had to go through massive provisioning to reduce their weight of NPLs in their balance sheet.

Despite low credit off take by the private sector the NPLs are still high which creates fear among the banks and they feel it better to keep investing into the government papers.