Investment in govt paper on the decline

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KARACHI: The trend of banks investing in government securities has been reversed. Banks are now turning their attention towards the private sector – a move that is expected to improve the management of loan books and may also boost an ailing economy, say financial sector analysts.


With yields on three-, six- and 12-month treasury bills (T-bills) having been cut sharply in the most recent auction, the interest of commercial banks in government paper auctions is also declining.


The previous government heavily relied on banks to finance a large fiscal deficit and ended up crowding out the private sector.


Data available with the State Bank of Pakistan show that for the period between July 1, 2012 and May 3, 2013, domestic credit to the private sector stood at Rs142 billion while government borrowing from commercial banks totaled Rs602 billion.


According to the SBP’s Annual Report for 2011-2012, deficit financing by commercial banks, including their holdings of government securities, accounted for 34.4 percent of their aggregate balance sheet.


However, banks are now reducing lending to the public sector and increasing their exposure to the private sector.


An economist at Standard Chartered Bank says that despite the fact that there are significant economic challenges ahead, the PML-N’s strong mandate has given rise to hopes it will adopt policies to shore up a weakening external payments position and enact reforms designed to boost economic growth. “Such policies will pave the way for growth of credit to the private sector,” he said.


Others tend to agree with his assessment.


“The banks had been aggressively investing in government paper as such investments were seen as safe – albeit less profitable – and resulted in the shrinkage of their loan books,” said MCB Bank Vice President Hasan Iqbal.


“After the elections, the confidence of domestic investors has improved, which is evident from the upward movement of the stock market and international credit rating agencies are also predicting an improvement in the country’s sovereign credit rating.”


The shift is also likely to make some conservative bankers very happy: the current crop of balance sheets are heavily skewed in favour of the government. Moving towards the private sector will allow banks to diversify their risk.

Courtesy:  The News

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