Running banks the easy way
THE commercial banks continue to invest disproportionately in government securities. However, this trend is far more pronounced in case of the private banks rather than the public sector commercial banks.
Look at the industry’s average advances to deposit ratio (ADR) of 52.6 per cent in September 2012 down from 56.6 per cent of September 2011 and compare it with ADR of local private banks of 49 per cent in September this year versus 54 per cent in September last year and you can see the point.
Deposits of local private banks (LPBs) grew 18.9 per cent to Rs5.334 trillion but their advances (net of provisions) expanded just 7.5 per cent to Rs2.612 trillion in one year to September 2012. This actually deteriorated their advances to deposits ratio. Their investment in government securities shot up 36.2 per cent year-on-year to Rs3.145 trillion by the end of September 2012.
This also removes the misconception that public sector commercial banks (PSCBs) care less for private sector borrowers and use most of depositors’ money in government securities. Deposits of PSCBs grew 13.2 per cent to Rs1.234 trillion by September this year and their advances (net of provisions) expanded 14.5 per cent to Rs774 billion. After achieving a faster growth in advances than in deposits, their ADR inched up to 62.7 per cent from 62 per cent. At this level their ADR is far more impressive than that of LPBs though in absolute terms it still leaves much to be desired.
Perhaps, more importantly, investments of PSCBs expanded just 19.6 per cent during one year to September 2012. In other words, PSCBs were not as aggressively investing in government securities as LPBs. But what actually explains the varying behaviour of these two categories of commercial banks?
“One way to look at it is this: public sector banks always remain under government pressure to make loans to businessmen and industrialists who either have strong links with politicians or they just work as their front-men” remarked head of lending operations of a large local private bank.
“As against that, private banks have to follow the rules of the business more strictly than public sector banks. That restricts reckless lending and I must admit that sometimes it shuts the doors upon some deserving borrowers as well.”
President of a local private bank came up with a more plausible justification: “In the group of PSCBs, there are only five banks and the only one that really matters is NBP (National Bank of Pakistan). So when you talk about their investments as compared to LPBs you are matching apples with oranges,” he said. He elaborated that “A bigger number of LPBs (22 against five of PSCBs) means involvement of a
large number of decision makers and more diversified set of circumstances that essentially determine how much of money should be lent to private sector and how much be placed in government securities.”
Basically it’s now between PSCBs and LPBs to compare their performance as groups because foreign banks’ presence has grown very thin.
That explains why their deposits fell nine per cent in the year to September 2012 to Rs161 billion and why their advances (net of provisions) slipped by Rs1 billion to Rs64 billion pulling down their ADR to below 40 per cent.
The State Bank is currently pursuing an easy monetary policy which is helping the government in reducing effective yields on its bills and bonds and thus cut its domestic debt servicing cost. Reduced cost of domestic debt along with a recent spike in non-bank borrowing of the government and falling inflation all mean that in near future the government will have greater ability to dictate rates of return on treasury bills and bonds. Keeping this in view it makes sense for banks to start lending more to the private sector where possibilities of earning a decent return are still good despite easing of monetary policy. But over the last few years, banks have rather become used to ignoring the private sector in the name of quality of credit demand or on excuse of the lack of demand itself.
But “this (fiscal) year will be different,” insists head of corporate credit department of a local bank adding that declining interest rate would push up private sector credit demand on the one hand and improved corporate earnings (as has been witnessed so far) would encourage them to expand businesses and increase output thereby kicking off a full cycle of economic activities in downstream industries.
“That, in turn, would again create more demand for private sector credit coming from quality borrowers.”
Fresh average lending rate of local private banks (excluding zero mark and interbank transactions) recorded a big decline of 268 basis points in the year to October 2012 coming down to 11.90 per cent from 14.58 per cent in October 2011. Compared to this, fresh average lending rate of public sector commercial banks (excluding zero mark up and interbank transactions) fell only 86 basis points—from 14.99 per cent to 14.13 per cent during this period.
This shows that public sector banks are sitting on larger volumes of deposits of zero mark-up rates and it also indicates that the reluctance shown so far by local private banks to lend aggressively to the private sector. It “was a strategic retreat and not a tactical withdrawal,” says a senior executive of Habib Bank.
“If we’ve been able to make a deeper cut in lending rates, we’re better-positioned to attract additional demand for bank credit from the private sector. That’s why we hope our lending to the private sector (during this fiscal year) would be higher than in the last year.”
Fresh average deposit rate of local private banks (excluding zero mark-up and interbank transactions) fell 110 basis points to 7.76 per cent in October this year from 8.86 per cent in October last year. Against this, fresh average deposit rate of public sector banks (excluding zero mark-up and interbank transactions) went down by 78bps to 7.70 per cent from 8.54 per cent.
This means that local private banks managed to keep a much shorter banking spread of 414 basis points as of October 2012 against a huge spread of 643bps of public sector commercial banks.
“A leaner banking spread available to local private banks indicates that in their lending to private sector businesses, they have mainly accommodated prime borrowers who (unlike ordinary industrialists and traders) get bank finances at quite cheaper rates,” pointed out a senior executive of state-run National Bank.
“Naturally then, public sector banks are accommodating the bulk of credit demand from ordinary businesses and industries as well as agriculturists.”