Quarterly Performance Review (QPR) of the banking sector for the period January-March, 2016 released by the State Bank on 9th June, 2016, shows that the banking industry of the country continues to earn handsome profits by investing their loanable resources largely in government securities. Net profits raked in by the banking sector during the quarter amounted to Rs 52.96 billion (profits before tax were Rs 81.6 billion), showing an improvement of 2 percent over the same period of last year. According to the asset portfolio, banks invested Rs 7.421 trillion and most of the investments were made in government papers, mostly in Pakistan Investment Bonds (PIBs), as overall advances observed seasonal decline owing to net retirements against commodity financing and SME financing. While banks' net investment increased by Rs 540 billion, advances of banking industry fell by Rs 34 billion to Rs 4.782 trillion. Though lending was negative, non-performing loans (NPLs) of banking sector increased by Rs 14 billion from Rs 605 billion at the end of December, 2015 to Rs 619 billion at the close of March, 2016. However, total deposits declined slightly by 0.6 percent during January-March, 2016 with dip in current and fixed deposits while saving deposits rose by 3.6 percent. With a slight fall in deposits, banks had to depend on borrowings from financial institutions, mostly from SBP, for funding necessary for asset expansion. Capital Adequacy Ratio (CAR) of banks came down to 16.3 percent which was still well above the local benchmark of 10.25 percent and international benchmark of 8.625 percent. The banking sector growth was also reflected through absorption of new human resources and expansion in banking infrastructure including ATMs and branches.
Although the latest QPR of the banking sector shows that Pakistan's banking industry continues to be sound and steady and there is no cause for worry on this account at the moment, it also speaks about certain emerging weaknesses in the system which need to be taken care of before they become a matter of concern. It is good to see that banks continue to make handsome profits and are making necessary investments in modern infrastructure. Equity holders are also amply rewarded with the result that share prices of most of the banks in the stock exchange are attaining new heights. Such a pleasant situation would of course help promote banking industry and financial intermediation which is vital for encouraging saving habit and investment process in the economy. Another encouraging aspect is that CAR is well above the ratios prescribed both by the State Bank and recognised at the international level. This is a good evidence of the solvency of the system and a cautious approach of the banking industry. However, certain weaknesses of the industry as revealed by the latest QPR also need to be looked into closely. The biggest challenge for the banking industry at present is, of course, high concentration of investments of banks in government securities and consequently, a slower expansion in private sector credit. This is largely caused by excessive government borrowings from the banking system but banks are also equally responsible for exploiting the situation by increasing their portfolio in risk-free, high yielding avenues of investment and limiting their exposure to the private sector which is risky by nature. Such a behaviour by banks is harmful for the economy in the long run. Another area of concern is a sharp increase in NPLs during a short period of three months. This may be due to a slow-down in the economy and losses to certain enterprises but the overall health of the industry is undermined to a certain extent by this development. Besides, the pace of growth of deposits continues to be slow and depositors, in general, are rewarded less than their due. This leads to the flow of money to real estate sector, shares market, etc. Since the SBP now enjoys a lot of autonomy under the laws of the land, it could independently take the necessary measures to ensure that the banking sector of the country continues to flourish on a sound basis to play its due role in the economic development of the country.