KARACHI: The government’s costly borrowing through Pakistan Investment Bonds (PIBs) enriched banks as top five banks profit increased by 25 per cent in the first half of the current calendar year.

In the second half of the fiscal year 2014, the government borrowed massively through PIBs.

The three-year PIBs offer 12.5pc return while maximum return on T-bills is 9.97pc. This huge gap of 2.5pc attracted maximum investment by banks in PIBs.

Banks keep their 83pc liquidity with government securities.

S S Iqbal, a fund manager, said that banks increased their portfolio with PIBs and earned as high as Rs62bn as return on PIBs. It surprised many analysts why government borrowed costly money instead of cheaper money through treasury bills. The costly money adds more burden to a heavily indebted government.

Banks’ holding of PIBs rose to Rs2.170 trillion while the stock of T-bills was Rs1.60tr till June 30, 2014. Total PIBs worth Rs3.223tr were sold by the government.

“The recently concluded results of the top five banks confirm the initial hypothesis of portfolio shift to PIBs on banking profitability,” said a research report of Shajar Capital on Thursday.

During the first half of calendar year 2014, top five banks showed decent performance as their combined profitability stood at Rs51.03bn in this first half as against Rs40.84bn in corresponding period last year, up 25pc,” said Syed Faizan, researcher at Shajar Capital.

Despite 15 basis points decline in the core banking spread, the net interest income of banks grew by 15pc to Rs106.1bn in the first half of this year on the back of high yield offering from long-term PIBs.

How rapidly the government accumulated debt through PIBs was visible from State Bank’s report which showed that 144pc more PIBs were sold within one year from Rs1.321tr in June 2013 to Rs3.222tr in June 2014.

As government debt has been rising fast, debt-servicing could lead to a default-like situation or it would require printing of money.

Fund managers said that attraction for PIBs was so significant that banks would continue to invest in government papers.

However, this practice will continue to hurt private sector which found some space in FY-14 to borrow from banks.

Published in Dawn, August 22nd, 2014