Eroding profit of Pakistani banks

The State Bank of Pakistan (SBP) has recently released its January-March 2016 review of the commercial banking sector. The SBP has expressed fears of corrosion profitability of banks in the coming days as the reduction in interest rate and easing yields on debts is affecting the sector’s income.

The report says, “In an environment of low-interest rates and falling yield on public debt, it would be challenging for the banking system to maintain the present level of profitability.” The central bank said high-yield credit off-take by the private sector may offset the downward pressure on interest income.

The SBP expressed hope, “Favorable monetary conditions and developments on other fronts, such as China-Pakistan Economic Corridor (CPEC) are likely to provide some impetus to the credit demand during June 2016.”

The overall performance of the banking system during the quarter indicated profit after tax improving by two percent YoY to Rs52.9 billion. Banks’ continuing investment in government papers led to one percent growth in the asset base of the banking system.

As against this overall advances declined but private sector advances increased marginally, mainly in sugar and automobile sectors. Deposit base saw a minor dip mainly in transitional financial institutions deposits, asset quality declined due to an increase in infected personal loans portfolio.

It may be appropriate to say that commercial banks have moved away from their core activities and totally focusing on investment in government papers. On top of that lending is driven by recommendations of the ruling elite, which is adding to delinquencies.  The private sector has been marginalized.

In such a scenario it has become pertinent that SBP should impose some cap on government borrowing to overspending on non-essential projects. The central bank should also bring down maximum limit of investment in listed securities by the banks.


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