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Why banks prefer investment over advances?

Published on 26th May, Edition 21-22, 2014


Recently released data by State Bank of Pakistan (SBP) about deposits, investments and advances of commercial banks for the month of April’14 can be termed a little disappointing when compared with March’14. Deposits remained pegged at Rs7.6 trillion, advances were recorded at Rs4.1 trillion at month investments slid by 1%MoM to Rs4.5 trillion, mainly because of commencement of trading of government securities at Karachi Stock Exchange and failure of the Government of Pakistan (GoP) to issue fresh Sukuk. According to the GoP’s initial announcement Sovereign Ijarah Sukuk equivalent to US$458 million was planned to be issued in the first week of May.

On YoY basis noticeable movement was visible in deposit growth, which surged by 13%. According to some critic the hike in deposit led to increase in investments and advances portfolio, which grew by 15% and 6% respectively. The data lend support to the belief that bulk of the deposits was used for investment in government securities offering risk free investment as against advances.

Both ADR and IDR levels went down in April’14 and settled below the last month’s level. ADR of banking sector reflected a MoM decline of 26bps to 53.89%, whereas IDR also followed the suit with a MoM decline of 60bps to 58.88%. However, On YoY basis, IDR improved by 86bps whereas ADR declined by 361bps on the back of an enthusiastic participation by scheduled banks in government securities auctions.

According to some critics, the incumbent government has not succeeded in overcoming ‘trust deficit’, which is evident from the fact that the private sector is still reluctant in adding new productive facilities. The situation in Pakistan’s largest city remains far from satisfactory. Various groups, i.e. land grabbers, kidnappers, booty collectors and target killers. In fact, both police and rangers have not achieved much success as their operations are aimed at certain groups, but those coming from up country continue to enjoy free hand. It is a common observation that that these groups use residents of the area as ‘human shield’.

In the past, elected governments have used commercials banks for achieving their political objectives and it is once again feared that the incumbent government may once again use depositors fund to ‘oblige’ its vote bank. According to some insiders, commercial banks have repeatedly refused to participate in bailout packages for some of the ‘white elephants’ like Pakistan Steel, PIA and even PSO. The stories of corruption in Pakistan Steel and PIA are known to all and sundry. PSO may not be a loss making entity, but no one can deny that it is a victim ‘circular debt’. Soon after coming into power PML-N government dished out about half a trillion rupees to clear circular debt. However, the outstanding amount has once again swelled to around Rs300 billion. It may be right that the rulers made a prompt decision, but it was aimed at ‘favoring a few’ rather than removing the root cause.


In these pages it has been highlighted repeatedly that unless the government ensures uninterrupted supply of electricity and gas at an affordable price, it should not expect investors to make fresh investment in production facilities. It is a fact that most of the industries are operating on capacity utilization that ranges from 50 to 60 percent only because of inadequate availability of electricity and gas. The worst suffering industries are fertilizer, textile and clothing, particularly made-up manufacturers and petrol and gas dispensing stations.

While the county continues to import huge quantity of POL products, local refineries are also operating far below optimum capacity utilization. Policy planners often say that imported POL products cost less, but completely fail to understand that running refineries below optimum capacity utilization can never make these competitive. It is also on record that foreign investors had shown keen interest in establishing three mega size refineries in Pakistan, but decided to quit because of bad policies. These refineries could have helped the country, not only self sufficiency, but also earns huge earn foreign exchange by exporting surplus quantity. It is still not too late the PML-N government should establish contact with the sponsors, remove their reservations and bring them back. In fact Pakistan is a natural corridor for the movement of energy products.

It is a common complaint that mega size projects could not be established in Pakistan because of paucity of funds. This perception is being created by those who are against creation of these projects as they wish to keep the country net importer of fertilizer, steel, chemicals, POL products. Two of the most naked examples are export of molasses and naphtha. The biggest regret is that many of sugar mills have facilities to produce ethanol, but government facilitates export of molasses, because most of the mills are owned by politicians and feudal lords who are enjoying access to power corridors. Similar refineries have been operating in this country for nearly half a century, but naphtha cracker has not been established and entire quantity produced is exported at throw away price.

Therefore, it may not be justified to hold banks solely responsible for lack of interest in extending funds to the private sector. First the government has to create supporting environment, come up with appropriate policies and then implement those in letter and spirit. The GDP growth rate cannot be accelerated without: 1) ensuring operation of existing industries on optimum capacity utilization, 2) creating new production facilities and facilitating the local manufacturers to become competitive in the global markets. The writing on the wall is that Pakistan will not benefit in any significant manner from GSP Plus status because of the lingering energy crisis.


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