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‘A harmful trend in banking sector’

February 21, 2014
A harmful trend in banking sector’

ASAD RIZVI  ARTICLE  (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)

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