AS the government is getting ready to present the federal budget 2012-13 on June 1, banks eye increased activity in the remaining weeks of the current as well as in the next year.

Bankers say that as the government is getting serious about containing ongoing energy crisis ahead of polls, this is expected to give banking activity a boost.

It has already decided to launch Rs70 billion worth of Term Finance Certificates to reduce the volume of the energy sector’s circular debt.

“Banks love government-guaranteed TFCs even more than treasury bills and bonds,” said treasurer of a local bank. Whereas the yields on the bills and bonds are determined at the time of auctioning, “Term Finance Certificates  carry pre-determined floating rates. And banks always manage to convince the government to keep a decent premium over whatever base rate they decide.” Bankers familiar with the planned launch of Rs70 billion TFCs say the base rate would be three-year KIBOR plus half to one percentage points premium.

They say that about half a dozen top local banks are willing to invest in these TFCs that would be launched, most probably, before the federal budget.

“Top local banks had invested heavily in previous tranches of government-backed corporate TFCs in 2010-11 and they are more than willing to invest in them again,” says treasurer of one of these banks.

Broadly speaking, banks anticipate more robust activity ahead for a couple of reasons. The next budget (being the last one of PPP-led government) is likely to be more people-friendly. Planning Commission has already indicated about larger development spending.

That means the government would be ready to spend on pro-people projects even if it means a higher-than-prudent level of fiscal deficit. “But as the next fiscal year is also the year for elections it would be politically too difficult for the government to borrow excessively from the central bank,” says treasurer another big local bank.

“The ultimate choice would be borrowing from banks. That’s why I believe the next fiscal year would mean more opportunities for us to invest heavily in zero-risk government T-bills and bonds.”

Up to April 27 of the current fiscal year, federal government’s borrowings from banks totalled Rs654 billion showing more than 100 per cent increase over what it had borrowed in the year-ago period.

That the government is eager to borrow more before the close of the year on June 30 is evident from the fact that during the week ending on May 11, it again raised in excess of Rs24 billion through Pakistan Investment Bonds (PIBs) against the pre-set target of Rs20 billion.

Banks are eyeing increased activity in the next fiscal year on the election fronts as well.

“You know how political parties get crazy about election-related spending, about contacting public and party workers, about holding public meetings and all that. All this means more activity for banks as well,” says an executive of one of the five big banks.

“In the present scenario, we foresee lots of activity particularly in branchless banking, inland transfer of funds and transactions in foreign currency accounts.”

Bankers also seem upbeat about prospects of lending to the private sector in the next fiscal year. They say that the strong recovery in larger-scale industry seen so far during this fiscal year would become stronger as the energy crisis would possibly be contained to some extent and with that would come up more demand for private sector credit.

Bankers say if the circular debt issue somewhat resolved, the power sector would grow faster in the next fiscal year.

And that too would generate additional demand for private sector credit from first class borrowers besides enabling oil importing and energy distribution companies and government-run energy sector agencies to clear their overdue bank loans.

Pressed by protests over prolonged power outages the government recently released Rs23 billion to independent power producers as part of its energy debt payment.

During the last 2-3 weeks the stock market saw the return of foreign investors, and tens of millions of dollars flew into special convertible rupee accounts (SCRA) of custodian banks.

Bankers say that inflows in SCRAs generate lots of business for them as money changes hands from SCRAs to the accounts of stock brokers to blue-chip companies.

“If this trend is sustained banks would see more activity in foreign currency accounts in coming weeks and months,” said chief foreign exchange dealer at a foreign bank.

Banking activities related to handling of home remittances and external trade are already high—with remittances showing an average 20 per cent annualised growth and volumes of external trade expanding month after month (though more because of inflated import bills).

“During the current fiscal year, we witnessed a sort of lull in foreign direct investment inflows but we hope the next year would be better and banks would be dealing with larger volumes of foreign exchange (in the interbank market) than they do now.” —Mohiuddin Aazim