KARACHI: The State Bank of Pakistan (SBP) on Monday changed banks’ exposure limits through amendments to prudential regulations, but stopped short of setting a threshold for investments in government papers.

“The aggregate amount of large exposures of a bank or development finance institution (DFI) will not, at any point in time, exceed 50 per cent of its total fund-based and non-fund-based exposure in finance facilities and investments, excluding investments in government securities and loans secured against government guarantees,” the SBP said in a circular.

“Large exposure will not be applicable to investments in government securities and loans secured against government guarantees,” it said.

An earlier circular issued in 2014 said the aggregate amount of large exposures of a bank/DFI would not exceed 50pc of its “total gross” advances and investments, excluding investments in government securities and loans secured against government guarantees.

“The aggregate large exposure limit of 50pc will, however, not be applicable to banks operating in Pakistan with less than 10 branches,” said the circular.

Banks and DFIs, which are noncompliant to the amended regulation on large exposure, will achieve compliance within nine months from the issuance of this circular. Such banks and DFIs will present time-bound compliance plan to boards of directors within next three months.

The exposure of banks to government papers is high. Banks’ investments in government papers constitute over 88pc of total investments.

Banks have been making profits despite poor performance of the economy for the last 10 years mainly because of their massive investments in government papers. Heavy investments in government papers hurt the private sector as banks did not want to expose themselves to risk in the presence of risk-free avenues.

More recently, banks have found it increasingly difficult to earn high profits amid a low interest rate environment and heavy retirement of government bonds. This has forced banks to increase their exposure to the private sector.

Data provided by the SBP last week showed the private sector so far borrowed Rs407 billion from banks during the first 10 months of 2016-17. The resulting high exposure of banks to the private sector could possibly have forced the SBP to caution banks.

Published in Dawn, April 25th, 2017