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Govt borrowings boost bank profits by 27pc

February 26, 2012

The State Bank of Pakistan. — File Photo

KARACHI: It is the government not the trade and industry which makes banks rich in Pakistan as the profit of large private banks rose by 27 per cent in 2011.

While presenting the bimonthly monetary policy a couple of weeks ago the governor State Bank was disappointed that most of the credit taken by the private sector was meant for working capital, also the banks heavily investing into government papers.

“Cumulative earnings of 4 banks (HBL, UBL, ABL, MCB Bank) reached Rs66 billion in 2011, up 27 per cent from 2010. Amongst listed private banks, four banks contribute 70 per cent of the market capitalisation,” said a research report of Topline Securities.

How vigorously government borrowing is rising each year is visible from the State Bank's latest report which shows that the government has so far borrowed Rs690 billion from the scheduled banks till February 8, 2012 since July 2011.

At the end of June 2011, the stocks of the government loans from schedule banks had reached Rs1.663 trillion explaining the causes of real profits for the banks.

This huge investment in government papers yields real profit for the banks and despite an ailing economic growth the banks have been making profits at least for four years.

Economists believe the fiscal deficit is rising higher than last year and it might be ended at over 7 per cent of Gross Domestic Product (GDP) till June 30. This will promote more borrowing by the government.

The IMF has been critical to the government fiscal policies and massive borrowing from banking system which finally stopped lending despite having an agreement for large amount of $11.4 billion. Pakistan received only $7.9 billion.

Like IMF, the State Bank has been frequently asking the government to stop borrowing from the banking system which crowded out private sector and upset the monetary management making it difficult for State Bank to deliver an effective Monetary Policy.During first this time period of slightly over seven months of this fiscal year the private sector credit offtake was Rs252 billion, though higher than last year but mostly for working capital (lending for short period).

While the private sector shows little interest on investment due to host of reasons including deteriorating law and order including political instability, the banks argue that lending in such situation is more risky. Rising non-performing loans justified their points to some extent.

Reluctance on part of banks deprived many sectors to invest and expand their operations which finally hit overall economic growth.