Pakistan's financial sector performance improves

ISLAMABAD The financial sector performance is improving inspite of the fact that commercial banks have accumulated large liquidity, and may face reduced profitability.

By From M. Aftab

Published: Sun 23 Feb 2003, 3:43 AM

Last updated: Wed 1 Apr 2015, 8:24 PM

The results announced by a number of banks and financial institutions and the dividends they have declared indicates that the financial sector is doing well, although the economy is lagging behind.

The increasing home remittances sent by overseas Pakistanis working in the Gulf, Saudi Arabia, Middle East and North America, besides other factors are helping boost the banks as well as other selected sectors of the economy.

The banks are now extending cheaper credit to corporates and consumer financing, loans for consumer durables, housing, small and medium enterprises, commodities, and other non-traditional users. The State Bank of Pakistan (SBP), the central bank has also eased conditions for the commercial banks to accept a variety of securities and collaterals to help credit takeoff. At the same time, banks report progress in collecting, or rescheduling the old defaulted loans that they claim were responsible for high lending rates for new borrowers.

The SBP has gradually reduced the lending rate for exports - the Export Refinance Facility (ERF) down to 5.5 per cent over which commercial banks can charge a maximum spread of 1.5 per cent, enabling exporters to borrow at 7.0 per cent. The idea is to push beyond the $ 10.4 billion export target for the current fiscal 2003.

Export credits are also available from the Asian Development Bank-financed "Dollar Window" at the rate of LIBOR plus two per cent. This total comes to 4.57 per cent, as of now. Credit for locally manufactured machinery for use in export production is also available at this rate.

At the same time, World Bank's affiliate for the private sector - International Finance Corporation (IFC) and ABN-Amro Bank have signed a $ 80 million trade enhancement facility to finance Pakistani private sector for importing industrial raw materials and capital goods. The central bank has also reduced the lending rate from 12 to 9.5 per cent for purchase of commodities. The 12 per cent rate, set on April 26, 2000, was both for the government and private business, engaged in export of rice, wheat and other commodities.

The central bank's discount rate was brought down from 9.0 per cent to 7.5 per cent in November 2002, from a high of 13 per cent on October 5, 2000.

As part of its efforts to bring down the interest rate, the SBP has also slashed the benchmark 6-month Treasury Bills (TBs) rate from 7.2 per cent in April 2000 to 3.2 as of now from a high of 14 per cent on June 7, 2001.

The SBP launched Pakistan Investment Bonds (PIBs) on December 14, 2000 to mop up money from the market. The PIBs have maturity periods of three, five and 10 years. All three started at a 14 per cent yield that is now brought down to 7.5 per cent. All these steps are aimed at proding commercial banks to provide chapter credit to business, industry and consumers so as to boost the economy, enlarge exports, and help utilise the pile up of liquidity. The liquidity build up, among other reasons, has resulted because business and industry was reluctant to borrow high-cost finance. Besides political uncertainty, poor law and order situation in several cities, including the industrial hub of Karachi, high interest rate was restraining new investment and working capital.

Commercial banks are now reporting an improvement in the private business utilisation of credit. The National Credit Consultative Council (NCCC) of the SBP estimates credit offtake to be 90 per cent high than last year. It projects money supply to rise to Rs281.5 billion or 16 per cent, up from Rs190 billion that was regionally estimated. The financial market is of the view that substantial credit needs of business and industry are being met by self-financing, utilisation of growing home remittances, leasing and term finance.

Large commercial banks, NCCC says, have increased agricultural credit by 22 per cent this year, exceeding their target for the second year running. It has asked commercial banks to reduce their lending rates for agricultural purposes by two to three per cent as already done by National Bank of Pakistan and the Allied Bank Ltd.

NCCC reports, the first half of fiscal 2003 - July-December 2002 - saw a 9.4 per cent monetary expansion to reach a level of Rs166.4 billion. It is attributed to larger inflows of home remittances sent by overseas Pakistanis.

There is some improvement in the case of recovery of defaulted and non-performing loans (NPLs) that had mainly piled up during the 1990s. Five state-owned banks and government-operated development finance institutions (DFIs) were involved in giving out these largescale credits. The default occurred because the credit was used for unsound projects, no tangible collateral was obtained and a large number of industrial units failed.

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