Bank prof­its up as World Bank pre­dicts low growth

The Pak Banker - - FRONT PAGE - Rahim Sheikh

AS the bank­ing sec­tor rolls on to pri­mar­ily pro­vide govern­ment with cash against a piece of pa­per called a 'bond', the pri­vate sec­tor re­mains starved of Work­ing Cap­i­tal to work with. The re­sult is that man­u­fac­tur­ing is slowly, very slowly, slow­ing down. The long to medium-term prospects of this sit­u­a­tion do not auger well for Pak­istan, and the first in­di­ca­tion of this clear pos­si­bil­ity came in the World Bank Re­port on the sub-con­ti­nent when it was pre­dicted that by the year 2020 In­dia would be grow­ing by 9.0 per cent, Bangladesh by 6.7 per cent, and Pak­istan by a mere 3.7 per cent. Mind you the ex­cuse of ter­ror­ism is, thank­fully, de­creas­ing and now as we sail to­wards calmer wa­ters there still are a few political mile­stones that need to be passed.

But be­fore we dwell on those, let us take a look at the lat­est State Bank of Pak­istan fig­ures out last week­end. The Quar­terly Per­for­mance Re­view of the bank­ing sec­tor end­ing De­cem­ber 31, 2015 and re­leased on Thurs­day last (data flow takes it time in Pak­istan), showed a quar­ter to quar­ter in­crease in the de­posit base of the bank­ing sec­tor of 6.9 per cent (12.6 per cent year on year). This they claim is be­cause of growth "driven" by cur­rent ac­count of fixed de­posits. Let us re­duce this high-sound­ing jar­gon to sim­ple lan­guage. It means that on pa­per, and on pa­per alone, the govern­ment has filled the stom­ach of bank fig­ures with more and more ' bonds', which in my view will turn out to be junk bonds. This banks call 'their as­sets'. What about the cash peo­ple de­posit in banks? The fact re­mains that most of it went to fi­nance govern­ment. The re­main­ing that came in be­cause of an in­creased flow from re­cov­er­ies from Non-Per­form­ing Loans set­tle­ments filled in the cof­fers. Thus in­creased de­posits and th­ese funds all went to govern­ment. What does this re­ally mean as to what is hap­pen­ing in the mar­ket. As man­u­fac­tur­ing slows down a lot of en­ter­prises, scut­tled by a lack of Work­ing Cap­i­tal, are clos­ing and re­turn­ing banks "stuck up ad­vances" as bankers call them. This money the ' junk bonds' suck up. The prob­lem is that IF and WHEN our dear coun­try wants to be­come a man­u­fac­tur­ing hub again, there will just not be a bank­ing sys­tem geared to pro­vide them with much needed Work­ing Cap­i­tal, let alone Pro­ject Loans.

Mind you this is the very rea­son the World Bank thinks that when this time does hope­fully comes, Pak­istan will not be in a po­si­tion to grow. So with a fast grow­ing pop­u­la­tion that is def­i­nitely ill-equipped with ap­pro­pri­ate education and an en­vi­ron­ment full of fa­tal­is­tic views about life, do Pak­istani banks feel they will have the money to fuel a re­cov­ery to a 'fast-track' econ­omy?

Now back to the SBP Re­port. The main claim is that the as­set base of banks have grown by 4.6 per cent. If th­ese junk bonds are the ' as­set base' then are we not on thin ground. Let us as­sume that the 'junk bond' base sup­port is re­moved, what as­set base do banks have? On this I con­sulted a high of­fi­cial of the SBP and he smiled bank and said: "Sheikh Sahib, it is bet­ter to re­main silent".

That is the prob­lem with what is wrong. Why must we re­main silent about core is­sues? The fact is that banks to­day have starved the pri­vate sec­tor of much needed cash to work on. The SBP Re­port claims that pri­vate sec­tor ad­vances have grown by 7.8 per cent. Good, but then let us an­a­lyse the de­tails of th­ese ad­vance. Th­ese are sea­sonal crop and in­fras­truc­tural con­tract ad­vances against govern­ment guar­an­tees that have been raised against govern­ment bonds. Imag­ine. It is like one left hand telling the other left hand that there is no need for a right hand. This is called, in western char­tered ac­coun­tancy cour­ses, as "The Clas­si­cal Ac­coun­tants Hand of Sleigh".

Now who in this cur­rent govern­ment has such an ac­coun­tant's bent of mind? Makes me won­der! If pri­vate sec­tor ad­vances were grow­ing by such glow­ing fig­ures, just why has man­u­fac­tur­ing de­pressed by 2.8 per cent? The an­swer I have tried to put be­fore the reader above. All th­ese fig­ures mean that Pak­istani banks will be en­joy­ing im­pres­sive prof­its flushed with govern­ment bonds and in­creas­ing set­tle­ment of 'stuck up ad­vances' (NPLs) with very short-term ad­vances to sea­son crop buy­ers and in­fra­struc­ture pro­ject pay­ments against bond guar­an­tees.

In the Year 2015 the af­ter-tax prof­its grew by an un­be­liev­able 22 per cent to a whoop­ing Rs. 199 bil­lion ru­pees. The profit alone means they sucked away Rs. 1,000 per liv­ing Pak­istani. Has the poor man be­come poorer in real terms? All you have to do is an­a­lyse the per capita in­come of a Pak­istani and see the per­cent­age of his in­come that flowed to­wards the cof­fers of pri­vate banks.

The SBP Re­port tells us that the 'Re­turn on As­sets' has in­creased from 2.2 per cent to 2.5 per cent, and this it is clar­i­fied is a "broad spec­trum" phe­nom­e­non. Nat­u­rally with lit­tle con­nec­tion to the man­u­fac­tur­ing sec­tor and guar­an­teed re­turns against govern­ment bonds, the re­turns have to in­crease. So which political mile­stones need to be crossed be­fore we can sail into calmer eco­nomic wa­ters? Firstly, Pak­istan has to grow out of one­man, or one-fam­ily, rule and head to­wards bet­ter gov­er­nance. For that political and eco­nomic de­vo­lu­tion is a must. This is be­ing re­sisted by the sta­tus quo. Only in this way can lo­cal economies pick up pace and a more truth­ful and rep­re­sen­ta­tive way of life adopted.

Till then all we will have are glow­ing prof­its of banks based on 'junk bonds', a cen­tral­ized power struc­ture, lit­tle education for the poor, and de­creas­ing man­u­fac­tur­ing strength. We will have more and more projects, with empty yet fancy claims, that will win fu­ture elec­tions. In the lon­grun it are the poor that will suf­fer, and in the process a few of the weaker banks will col­lapse. The SBP Re­port has for the first time in­di­cated to­wards that too.

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