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Performance of the banking sector in Pakistan — Impact of low interest rate on credit

Published on 17th Aug, Edition 33, 2015


The banking sector through CY13 faced tough challenges with external factors including law and order situation, political uncertainty, strikes causing closure of bank branches in distressed areas to name a few. SBP require banks to have minimum capital of PKR 10 billion by December 2014 which has been a challenge for few banks. The CAR for the banking industry was 17.1 percent in CY14 as compared to 14.9 percent as on CY13. ADR for the banking industry was 48.2 percent in CY14 as compared to 49.5 percent as on CY14. Despite facing the above challenges, banks have done well as a business.

Banks in 2014 due to declining interest rate witnessed growth in business and lending. Through it was previously believed large 5 banks would prefer maintaining the current portfolio of retail and corporate customers and yield the maximum out of the current portfolio, these banks have shown significant growth. Smaller banks faced a tougher challenge as asset quality including building a deposit base was the key. With respect to small and mid-sized banks, strategy to pull deposits has been high rate to clients, which has reduced the spreads between lending and advances. Smaller to mid-sized banks were seeking new relationships only on more strict lending criteria. Those who had a genuine need for financing either would find significant delays in the approval process or an approval based on stringent qualifying criteria at higher mark-up rate ranging between 9 to 12 percent on home loans, personal loans and automobile leasing.

In order to stimulate the economy and in the wake of declining inflation, SBP kept reducing the discount rate to encourage private sector credit, which otherwise was being invested in Treasury Bills earning a risk free rate of return. Despite reduction in rates, banks are not actively advertising their products and still find comfort in risk free money market investments and the fact that customers will themselves approach banks to take advantage of low interest rates. With respect to macro indicators, total assets of banks increased from PKR 10,537 billion in CY13 to PKR 12,106 billion in CY14. Deposits increased from PKR 8,318 billion as on CY13 to PKP 9,230 billion in FY14. Profit after tax for the banking sector increased from PKR 112 billion in CY13 to 163 billion in FY14. Advances increased from PKR 4,047 billion in CY13 to PKR 4,447M in FY14.

Banks due to increasing trend of Non-Performing loans, are vigilant and would even consider declining a case which otherwise would be sound. There were numerous instances in 2014 where such reasons for refusal become superficial. Consumer loans carry a higher spread compared to corporate loans and is generally driven through booking of clients to ensure that profitability through volumes. Due to prudent approach of the banking sector and focusing on asset quality banking NPLs reduced from PKR 607 billion in CY13 to PKR 605 billion in CY4.

Advances in Corporate loans as mentioned above vary from bank to bank in terms of strategy. During 2014, large banks with an existing strong corporate portfolio spent little effort marketing new clients. Walk in clients were usually preferred only if financials, projections and the business model showed any viable sense to the bankers. Small to mid-sized banks are still open to new client relationships to grow the banks, however, clients are only being considered who otherwise have good credit history with other banks. Advances through corporate loans increased from PKR 3,013 billion in CY13 to 3,243 billion in CY14


The bank wise consumer portfolio was recorded to PKR 273 billion in CY13 compared to PKR 294 billion in CY14. NPLs in the consumer sector reduced from PKR 43.71 billion in CY12 to PKR 37.19 billion in CY13 consequently reducing the infection ratio from 13.6 to 11.7 percent during the same period under review. With increased focus on the recovery of bad loans, banks have well established recovery units assisting banks. It is also said under present circumstances, banks would only offer consumer products to those who ideally do not need any financing options since they are self-sufficient with residual cash at their disposal.

Credit cards is a popular bank product, however, not much activity has taken place since 2012 in this line of business. According to SBP, advances against credit cards were PKR 21.42 billion in CY13 as compared to PKR 22.44 billion in CY14, infection ratio increasing from 10.5 to 10.8 percent during the same period under review. Credit cards carry the highest mark-up rate ranging between 34 to 42 percent.

Mortgage loan advances marginally reduced from PKR 53.05 billion in CY13 to PKR 52.30 billion in CY14 with infection ratio reducing from 28.5 percent in CY13 to 17 percent in CY14. NPLs during the same period reduced from PKR 15.16 billion in CY13 to 14.10 billion in CY14. It is estimated that Pakistan has a shortfall of 9 million housing units considering the population growth expected to increase year on year, mortgage loans will be demanded through the year if only banks are willing to lend at reduced rates through trend of declining interest rate to stimulate the economy.

With the influx of cars and import of reconditioned cars, vehicle sale in Pakistan is on a rise, advances for automotive financing increased from PKR 55.82 billion in CY13 to 76.7 billion in CY14, infection ratio reducing from 6.6 percent in CY13 to 4.9 percent. During 2014, banks need to focus on long term advances, focus more on export based industries, project based financing with focus on green field ventures which is the need of the economy. Furthermore, consumer financing needs to pick up. One area where Pakistan continues to lack is financial innovation and development of new products and services. We witnessed the K-Electric Sukuk, Arif Habib REIT and Engro Rupiya being the only two major developments in recent times. Bond market needs to develop where investors can take a long term view. One way to develop domestic markets is to look at more advance economies such as USA and Europe to follow best practices.


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