Banks earn 50% interest from government securities: State Bank

KARACHI: The banks are earning 50 per cent of interest from the investments in the government securities such as treasury bills and investment bonds.

In its Financial Stability Review – 2020, the State Bank of Pakistan (SBP) said that the analysis reveals that in the last 14 years, the government’s reliance on the banking sector has steadily increased for fiscal needs. “Resultantly, it has influenced the balance-sheet structure of the banking sector,” it said.

“With [an] increased exposure in [the] government securities, [the] share of interest earnings from [the] government securities in total interest income has reached to around 50 per cent in calendar year 2020,” the SBP added.

The level of interest earnings on these securities mainly depends upon the volume of investments, which is determined by the financing needs of the government, and the prevailing policy rates.

In 2020, the increase in the tenor of the securities led to higher returns on government securities, though the policy rates were significantly cut during the year.

The central bank said it is critical to note that the persistence of fiscal deficits and high demand for the bank credit might have affected the risk appetite of the banks and weakened their true economic role of financial intermediation.

“This bears far reaching repercussions for the future economic growth of the country,” it added. Also, the maintained solvency backed by higher exposure in the risk-free securities manifests low risk-taking and inefficient allocation of the capital.

On the positive side, high concentration of assets in the government securities provided necessary support to the banks’ earnings against business cycles, particularly in downturn times.

“However, there is a need to strike a balance between financial stability and due risk taking, which is essential for effective financial intermediation between general savers and private sector enterprises,” the central bank said, adding that for this purpose, a comprehensive approach is required from all the stakeholders.

“[The] banks need to enhance their role in the provision of credit to the private sector, especially to the private enterprises and high-potential sectors like SMEs [Small and Medium Enterprises], agriculture and mortgage finance.”

Given the broad-based and far-reaching implications of the construction industry for the economy, the State Bank of Pakistan is pursuing different initiatives in coordination with the government to promote housing finance, it said.

The review also said the government needs to broaden its revenue base and look for alternative sources of funding for its fiscal needs to reduce reliance on the banking sector. Moreover, collaboration between the policymakers and the market participants is essential to promote savings in the economy and develop a vibrant capital market for effective intermediation.

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