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‘A harmful trend in banking sector’ – March 24

March 24, 2013

Apropos editorial ‘A harmful trend in banking sector’, I find it necessary to highlight some of the important and relevant missing links that need more attention and clarity. It seems that very few people pay heed to this ballooning problem and majority of us is least worried about the cost that the nation has to pay for government securities. By the end of FY13, MTBR could hit Rs 2 trillion mark and the sale of T-bill-PIB-Sukuk could surpass Rs 5 trillion mark, which means that annual average cost of financing would be roughly between Rs 650-680 billion.

Investment in government securities may have nothing to do with elections or politics; but it needs attention at the highest level. You don’t need rocket science to do calculations and look for reasons to find the cause behind this mess. It is because there is no economic growth plan and hence revenue to GDP ratio is on decline, whereas spending is met through heavy borrowings that push deficit to new highs.

For the banking industry it is one of the most lucrative risk-free businesses, larger than any other product offered in the country, the size of government securities that matches the size of country’s schedule banks deposit will comfortably surpass bank deposit by FY13 end. The size of annual deficit financing is huge, which is almost 40 percent of the annual revenue collection; it is three times the size of private sector credit, more than two times bigger than of the size of bank lending to agriculture sector and the annual deficit financing amount is more than the IMF loan amount that Pakistan received in instalments in almost 2-1/2 years.

Furthermore, I wish to respond to your note on banks viewpoint that cost could rise due to SBP’s instruction to guarantee 6 percent return. Please note that it is important to point out that the impression given that schedule bank’s cost of deposit is 6 percent is incorrect. My argument is based on ratio that on total Rs 6.6 trillion bank deposit, savings deposit is Rs 2 trillion, current account deposit is Rs 2.7 trillion and the period of remaining Rs 1.9 trillion in time deposit ranging from 1 to 12 months that roughly averages around 7.5 percent. Therefore, based on the calculation above, average cost of banking sector deposit in percentage terms is roughly around 4.65 percent and not 6 percent whereas, one of the major causes behind a constant rise in currency in circulation that has touched an alarmingly high level of Rs 1.981 trillion is due to low rates offered by banks to its depositors.

The concern shown in the editorial that economy faces huge risks is genuine and true. This is mainly because no effort has been made to stimulate economy, instead subsidies in energy and agriculture sectors are distorting the economic numbers. Economy will never prosper if the spending is not made in right areas that also causes revenue collection in percentage to GDP to fall, as business activity slows down and the size of deficit inflates. A slowdown in non-performing loans (NPLs) is not because of improved policies, but because no funding is allocated to new business areas that has led to slow the pace of NPL growth. Higher discount rate policy is not economy friendly, nor does it help weak businesses to flourish.

I totally disagree with the bank concern about cost they often refer. Banks are blessed with a heavenly situation and are placed in a very comfortable position due to an extraordinary high return in government securities due to low deposit cost. Banks are minting money because if inflation is higher than the savings floor rate of 6 percent. Borrowers are technically fleeced with a negative return on deposits due to central bank’s faulty policy, as PLS rate should have to be close to inflation rate.

Lingering on with a higher discount rate policy without a plan has brought the nation closer to an economic collapse because higher discount rate has hit the economy from all sides, causing a sharp economic slowdown, unemployment, stretching NPLs to maximum due to inability of business houses to run profitable ventures. A slump in export volumes and revenue shortfall forced government to print money. Blaming shortfall in FDI as one of the causes of pressure on Forex reserve is short sightedness to divert attention because investors do not throw their money in any deep hole knowing well that it could be an endless pit. Weak economic conditions and lack of political stabilisation would never attract foreign investment.

But the continued trend of the high discount rate, which is still close to double-digit will ultimately lead to financial troubles as managing debt would become impossible. In 2011, total stock of MTBR and T-bills/PIB/Sukuk was Rs 4.132 trillion and by 2013, this figure would hit Rs 7 trillion, which means in the next 3-4 years debt growth at same pace will see an addition of another Rs 5 to Rs 6 trillion and total debt could easily hit Rs 20 trillion marks. This why global policy rate of almost all the developed economies is close to zero or 1 percent.

Though this could be different argument, Pakistan should learn lesson from Cyprus, which is the most recent case begging for Euro 10 billion loan assistance, as the country’s banking system could collapse. Hence, Cyprus is at the mercy of donors. To obtain deposits, Cyprus has to pool 5.8 billion euro to get euro 10 billion financing and they have decided to impose levy on depositors. Hence, depositors with deposit of under euro 100,000 will have to pay a levy of 6.75 percent and depositors with above euro 100,000 deposit will have to pay a 9.9 percent levy. Cyprus parliament unlike other European parliaments refused to accept this proposal and the country is now in a fix. It is looking for another alternate that has once again put the European economy in jeopardy.

In the next 50 days, Pakistan is heading for elections with a heavy financial burden, which either gets unnoticed or Pakistan’s financial mess is a matter of less importance for our politicians. We all know that the country is faced with domestic unrest with a plenty of financial uncertainties, but what most of us do not know is that what more worse could be coming, because we never had a plan. Every political party is talking about economic difficulties, but offers no constructive plan.

The immediate challenge that we are facing, is the falling FX reserves and the ballooning debt. The IMF is the most horrible lender that targets economic slowdown in the name of austerity, by curtailing spending, which also helps reduce fiscal deficit. The IMF demands depreciation of currency and hiking of discount rate. Pakistan went to the extreme without achieving result. No economy has made any strides by embracing IMF therapy. That IMF does not put a condition of taxing housing and agriculture sector prior to release of funds is a big question.

(The views expressed in this article are not necessarily those of the newspaper)

Copyright Business Recorder, 2013

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