KARACHI: Banks are utilising deposits of Balochistan and Khyber Pakhtunkhwa in other provinces or investing in government papers to earn higher profits, depriving these provinces of better economic prosperity through lending.
The recent Financial Stability Review (half yearly review from January to June, 2011) by the State Bank identified that banks have been using deposits collected from Balochistan and Khyber Pakhtunkhwa in other provinces or lending to government.
The report said that advances to deposits ratio is on the decline, suggesting that banks are placing most of their incremental deposits in investments instead of advancing loans.
“Sindh mostly enjoyed highest ADR over recent years, which is evident from the greatest percentage of advances against collected deposits, while Punjab has trailed closely.
“The ADR has been considerably lower for both KP and Balochistan where banks have lent less than 20 per cent of deposits collected from these provinces,” said the report.
These patterns are essentially dictated by the level of business opportunities and consequent borrowing needs of firms and individuals in respective provinces.
For example, higher ADR for Sindh can largely be explained by the business activity in Karachi alone, the financial hub of the country.
Political parties have been raising the issue of this trend which allows banks to invest or lend money collected in one province and invest in other provinces.
Bankers said there was no restriction for this kind of banking in Pakistan.
The report said that the ADR pattern for Islamabad appears interesting as its ADR has surged from 2007 onwards. While a major part of the rise is due to small base effect, there appears to be relatively stronger lending activity in the capital territory in recent years, potentially on the back of real estate developments, it added.
The report said since 2008, credit risk of the banking industry had significantly increased due to deterioration in macro-environment i.e. severe power shortages, poor law and order situation, inflationary pressures and global economic slowdown.
Noticeable surge in delinquencies and loan losses have dampened banks’ risk appetite with a consequent fall in lending to private sector, except for higher quality borrowers or for seasonal credit.
The review said during the first half of the current calendar year, burgeoning government borrowings amid growing fiscal slippage have also provided banks a continuous stream of lucrative risk-free securities, further augmenting their risk-averse lending behaviour. “Consequently, there has been a noticeable flight to quality in banks’ credit portfolios,” said the report.
For instance, investments predominantly in government papers posted a strong growth of 22.3 per cent, compared with 1.7 per cent growth in lending to private sector during the half year under review, it added.
The banking review said banks’ lending strategies have been contingent upon their ability to mobilise low-cost, stable deposits in the form of current and saving accounts (CASA).
The big five banks, with 51 per cent market share, conveniently mobilise greater amount of CASA, thanks to their brand recognition and extended outreach in the market.
Accordingly, these banks are well positioned to target high quality borrowers, and are also relatively more into public sector lending and commodity finance. On the contrary, smaller and medium sized banks generally mobilise deposits at relatively higher rates, it added.