Record investment in govt papers

Banks investment in government papers during 2014 reached an all-time high while the credit penetration remained the lowest in region. Massive investment in government papers has not only crowded out private sector, but created a liquidity gap in the banking system.

The SBP on Friday injected Rs689 billion for 10 days into the banking system to improve liquidity. Analysts said that falling inflation and the government's lesser borrowings are likely to improve liquidity situation. They expect a cut in the interest rate which would force banks to extend loans to the private sector instead of parking money in government papers amid falling yields.

They also believe that over 50 per cent plunge in the oil price has also created a great opportunity for private investors to benefit from the low inflation environment, which stood at 4.3pc in December 2014. "Investment to Deposit Ratio (IDR) of banks increased to 61.2pc in 2014 as compared to 54.1pc in the preceding year. Investment in government securities touched new peak as such a high IDR level has never been achieved previously," said a research report of Topline Securities. Since the yield on government papers were much higher than the inflation, profits of the banking industry jumped in 2014. The SBP reported that till Nov 30, 2014 commercial banks' holdings of government papers rose to Rs4.474 trillion. "We preview 2014 earnings of top six banks, where we expect sector's profitability to expand by 27pc year-on-year basis," said a research report of JS Securities. Total investment of scheduled banks surged by a sharp 26pc in 2014 as banks invested heavily in long-term Pakistan Investment Bonds (PIBs). The investment in government papers widely affected credit penetration which is obvious from low monetary expansion that stood at 3.06pc in the first half of this fiscal year as compared to 4.76pc during the same period last year.