The central bank has announced changes in the banks’ exposure limits though major amendments to prudential regulations. However, a threshold of investments has not been set for government papers.
In a circular issued by the State Bank of Pakistan (SBP), it was stated:
The aggregate amount of large exposures of a bank or development finance institution (DFI) will not, at any point in time, exceed 50 per cent of its total fund-based and non-fund-based exposure in finance facilities and investments, excluding investments in government securities and loans secured against government guarantees.
Central bank’s statement added that “Large exposure will not be applicable to investments in government securities and loans secured against government guarantees.”
The aggregate amount of large exposures of a bank or development finance institution (DFI) will not exceed 50% of its total fund-based and non-fund-based exposure.
The previous circular, issued back in 2014, said that the total amount of large exposures of a bank or DFI should not exceed 50 percent of its “total gross” advances and investments. It did not include government securities and loans secured against the government guarantees.
The above mentioned limit will no longer apply to banks operating in Pakistan with less than 10 branches.
Banks and DFIs, which currently do not comply with the amended regulation on large exposure, will have to achieve compliance within the next nine months. These banks and DFIs will have to present a compliance and schedule plan to their board of directors within three months of the issuance of this circular.
At present, banks’ exposure to government papers is high and their investments to these papers is valued at over 88 percent of total investment.
Despite poor economic performance of Pakistan, banks have continued to make profits during the past ten years due to the massive investments in government papers. Such a scenario hurts the private sector as banks refrain from exposing themselves to risk in the presence of risk free avenues.
The private sector has borrowed Rs. 407 billion from banks during the first ten months of 2016-17
In recent times, banks have found it difficult to retain high profits due to the low interest environment and increasing retirement of government bonds in Pakistan. This has resulted in banks’ higher exposure to the private sector.
According to data provided by the SBP, private sector has borrowed Rs. 407 billion from banks during the first ten months of 2016-17. This increasing exposure of banks to the private sector could has pushed the SBP to alert banks operating in the country.