KARACHI: Banks’ financials remained sound but their advance-to-deposit ratio (ADR) plunged to 46.4 per cent by the end of 2015, said State Bank of Pakistan’s (SBP) Financial Stability Review issued on Monday.

The ratio, which has been on the slide for some year, was 75.9pc at end-2008 and 48.6pc at end-2013. The prime reason behind the fall of ADR has been the slow credit growth relative to deposits, the report said.

Growing credit risk in some key sectors such as textiles and lengthy judicial process for the recovery of non-performing loans (NPLs) have made banks risk averse, hence the reluctance to lend to the private sector. The deposit base, however, has steadily been growing resulting in lower ADR.

The limited availability of external funding for the resource-strapped government has forced it to depend increasingly on banking funds. Public sector exposure has been expanding, not only in terms of banks’ investments in sovereign papers but also through lending to public sector enterprises (PSEs).

Although banking sector’s exposure to government contains the credit risk, it has some inherent issues, said the SBP report. The financial depth has improved as financial assets-to- gross domestic product (GDP) ratio has increased to 68.4pc in 2015 from 59.4pc in 2015 and 56.4pc in 2013.

The holding of sovereign papers (particularly of longer-term maturity) exposes banks to market risk. Aggressive funding to public sector may also create some bouts of liquidity shortages. Moreover, in case of any easing off in fiscal reliance on banking funds, an orderly unwinding of the huge investment portfolio might be another challenge. It will be testing for the banks to deploy the released funds in alternative avenues which could generate decent income stream within their risk appetite.

Strong assets growth and revival of private sector credit, along with gradual improvement in the asset quality further strengthened the overall financial position of the banking sector. The banking sector observed growth of 16.8pc in 2015 (average growth of 13.2pc during 2013 to 2015) to reach Rs14.1 trillion as of end-December, 2015.

During the same period, advances grew at a modest pace of average 8.1pc (average 8.7pc during 2013 to 2015), whereas Investments — mostly in government securities — increased by 30pc (average 20.1pc during 2013 to 2015). The asset expansion has mainly been financed by deposits growth of 12.6pc (average 12.5pc during 2013 to 2015), followed by financial borrowings.

The SBP said the flow of advances to the private sector started to gain momentum after 2013 owing to improving macroeconomic environment, better energy supply and security condition, and positive sentiments of both domestic and foreign investors.

The growth in gross advances during 2015 at 8.1pc, though lower than previous year’s growth of 9.4pc, was still higher than average growth of 6.2pc during 2010 to 2013. Moreover, 2015 observed decent growth despite outstanding advances to the textile sector.

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