LIQUIDITY PROBLEMS IN BANKING SECTOR
Nov 10 - 16, 2008
Prevailing uncertainty in the country on political economic and security fronts has sent ripple of anxiety to the investors who have withdrawn their money from the country adversely affecting the growth of key economic sectors. Since the beginning of this year, the country has witnessed massive flight of capital, real estate slump, crash of stock markets, severe liquidity crunch in the financial sector, depletion of foreign exchange reserves and devaluation of local currency against all major currencies including US dollar. Global financial crisis is another factor that created difficulty for the country to raise money through its privatization proceeds in the international markets. Surprisingly, the country's banking industry has so far absorbed all financial and political shocks. It is still stable and has the capacity to absorb more shocks, according to the local bankers.
During past five years, the financial sector has played an important role in the macro-economic growth of Pakistan. The banking sector in particular has shown a phenomenal growth and its vitality has been crucial for national economy. Pakistan banking system has not only managed to meet the financial requirements of the public sector, but it has also catered to the needs of the stock market and the non-bank finance sector. Over the last five years, the banking system has illustrated its capability to be strong and robust system which has great prospects and potential to grow given the retail market of the country as captured by its population base and growing per capita incomes.
The high government borrowings from the banking system put more stress on liquidity.
According to an estimate, credit to public sector enterprises from banking system expanded by Rs 53 billion while bank credit to private sector has gone up by Rs 29.3 billion in the first 11 weeks of the current financial year. This is in addition to Rs 271 billion borrowed by the government from the central bank. Overall, borrowing by the government is estimated at Rs 116 billion and non-government credit has expanded by Rs 82.5 billion.
Despite pursuing a tight monetary policy, the country's central bank has so far helplessly been watching the fast erosion of its own foreign exchange reserves. The central bank utilized foreign reserves for foreign debt payment, as the country's payment under debt servicing crossed 3 billion dollars mark during last fiscal year. About $1.2 billion debts have been rescheduled in fiscal year 2008 due to the huge burden of debt servicing.
Pakistan's real gross domestic product (GDP) may decline to 3.5 percent and inflation may accelerate to 23 percent in the fiscal year or 2008/09 (July-June), according to IMF's World Economic Outlook report. The country registered a growth of 5.8 percent in the fiscal year of 2007-08 and had targeted 5.5 percent growth for the current fiscal year. The report projects the country's full year inflation to end at an annual average of 23.0 percent. The main concern is that a buildup of stress in the global financial system and a sharper than anticipated global slowdown could further weigh activity for Pakistan, according to the report.
Last month, the State Bank of Pakistan intervened to lubricate the financial markets and it released Rs 250 billion in the first round between October11 to October 20. The central bank additionally released Rs 30 billion on November 01. Central bankers and regulators have been now fire-fighting for over 15 odd months, according to the central bank's Governor Dr Shamshad Akhtar. The steps which have so far been taken to solve the liquidity problems in banking industry include steady easing of monetary policy, liquidity injections of unprecedented levels through offers of rounds of term facilities and specialized arrangements, and taking illiquid securities off the financial institutions' books etc, to a range of fiscal tax breaks and financial market revival packages that aim to recapitalize banks, liquidate troubled assets and further lubricate financial institutions.
The central bank lowered the cash reserve requirement (CRR) for banks to 7 per cent from 9 percent in two phases to overcome liquidity shortage in the banks and also offered exchange companies for unlimited supply of dollar at a rate of Rs 80.
The domestic money market has been strained by the widening financing gap and outflow of foreign exchange. During past three months, the Net Foreign Assets (NFA) of the banking system have depleted by Rs 166.5 billion. The excessive recourse to the banking system borrowings is straining the credit availability for the private sector and is also causing complications for effective liquidity management, according to Shamshad Akhtar. The fiscal stress continued to be high due to all time record borrowings of Rs 689 billion from the central bank in the last fiscal year, while the government borrowings have continued to rise unabated in the current fiscal year. The central bank will continuously monitor the liquidity situation and may review the change in the CRR accordingly.
Throughout last month, the speculations have been in circulation in the money market about country's default and the government's intention to seize bank lockers and freeze foreign currency accounts. The speculations about default got credence when the Standard & Poor's downgraded Pakistan's sovereign ratings to the junk category on October 6. These rumors have depreciated the rupee to a record low of Rs.82 to the US dollar in inter-bank market. Local analysts fear that the rupee may further erode its value touching a record low of Rs.100 to a dollar if immediate measures are not taken to stabilize the local currency. The dwindling foreign currency reserves has limited the scope for intervention of country's central bank, as there are no inflows and a shortage of supply of dollars in the market, according to local currency dealers.
Some analysts believe that the country's banking system is likely to be choked if liquidity problem is not resolved. The depletion in country's foreign currency reserves drove the net foreign assets down by Rs 167 billion last month, as against Rs 24 billion fall at same time last year. The experts believe that domestic liquidity needs to be generated through forex inflows. The non-bank financial institutions (NBFIs) and mutual fund industry would become non-functional if corrective measures are not taken.
SAUDI PAK OFFERS CLEAR ADVANTAGE IN TERM DEPOSITS
Saudi Pak Bank is creating a buzz over its recently launched "Salana Munafa" term deposit scheme. The scheme gives depositors 14.5% return in just one year of investment of Rs. 1 LAC or more.
The market for term deposits is currently very competitive with almost all the big banks (and many small ones as well) flaunting their menu of term deposits. Even in this barrage of advertising, Saudi Pak distinctly stands with its unique and 'must have' product.
Saudi Pak Salana Munafa offers 14.5% p.a. for 1 year on as low a deposit of Rs. 1 LAC. Currently, no other bank is offering such an attractive return on such a low investment and term, giving Salana Munafa a clear advantage over all other term deposits in the market right now.
Given this fact, Saudi Pak Bank is also being extremely clear about the deposit scheme in their communication. While some might promise big profits and hide large minimum investments and long investment periods in the fine print, Saudi Pak has put everything front and center. About the only thing in fine print is the government tax that is required by all banks.
With the current economic conditions, many citizens are concerned about how to best invest and protect their savings. Saudi Pak Bank has chosen the perfect time to introduce a term deposit with a clear advantage.