Massive government borrowing through the banking system has ensured that the banks have easy pickings without having to lend much to the riskier, private sector.
But, the incoming government appears poised to push the banks back to their core duty of lending to businesses. Finance Minister Ishaq Dar has announced that government T-bills that have so far been fodder for banks will soon be offered on local bourses as well.
At the very least such a move will bring more competition against banks in this realm.
Stock brokers and investors are so far unaware of exactly how the T-bills will be listed at local bourses. However, that hasn stopped market participants from hailing the development as a positive one.
According to Tariq Iqbal Khan, former MD, NIT, this would enhance the liquidity of government securities, resulting in the formation of an efficient price discovery mechanism. He opined that the initiative would lay the foundation of an efficient bond market in Pakistan which would provide good investment alternatives to the general public.
According to industry experts, the banks may also benefit as they can easily meet their daily reserve requirements by selling and buying the securities at the bourses at market rates, instead of approaching banks or SBP. But bankers have creased foreheads over the growing competition.
An analysis reveals that while non-bank and corporate entities barely hold 22.5 percent of outstanding government securities as of June 2013, banks make up 77.5 percent of the same, thats a whopping Rs3,822.1 billion.
Bankers concede raking in big profits by lending publics money to the government is about to get tougher. They will have to offer more attractive deposit schemes and look for alternatives in the private sector to keep the bottom line intact.
But, the other market participants assert the listing of T-bills on stock exchanges will not dent banks investments, given governments seemingly insatiable appetite for borrowing. They argue that the government is not splitting the banks share of the pie; their simply making another one.
Earlier efforts to mobilise lending to private sector include a high floor on rates to be offered on savings deposits, cuts in discount rate and calculation of profits on bank accounts using average monthly balance.
Those steps did not generate any mentionable increase in banks lending to private sector. If implemented, the announced measure may yield better results on that front too. That would be a welcome development for credit starved businesses in the country.
But, while the hegemony of the banks may be broken by this step, the KSE appears set to gain a potential monopoly over Islamabad and Lahore stock exchanges since the T-bill window is so far only planned to be set up at the biggest bourse.
The success of this endeavour is nowhere close to guaranteed, given a clear lack of incentive for brokers to push the product, unless the margins they earn from it end up being significantly higher. The proposal nevertheless is exciting. Perhaps a multiparty stakeholder roundtable should be in the offing soon.
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