Bank loans worth Rs2.5 trillion at risk
It comes with waning resilience of small banks, pressure on insurance firms
A Reuters file image.
KARACHI:
The Covid-19 pandemic, which is still battering Pakistan’s economy, has put bank loans worth over Rs2.5 trillion at risk with decreasing resilience of small banks and mounting payment pressure on insurance firms while possibly denting the country’s exports by around 30%, the central bank reported.
“Highlighting the risk of deterioration in the financial health of their clients and its spillover effects, banks estimated around 28.52% (Rs2.51 trillion) of their advances (loans) on being at risk,” the State Bank of Pakistan (SBP) said in the Financial Stability Review - 2019.
Banks highlighted the risk in two surveys conducted by the central bank in March and April 2020 in order to assess financial implications of the Covid-19 pandemic and take relevant measures to mitigate the risk.
“The resilience of small-sized banks starts waning towards the end of the simulation period. Besides the banking sector, non-bank financial institutions could also face challenging conditions. For instance, the insurance sector could experience stress due to a rise in claims related to life and health segments,” it said.
“Moreover, the disruptions in supply and demand, caused by the pandemic, are likely to dent cash flows of the corporate sector, which may lead to a lower repayment capacity and put pressure on financial stability.”
With the persisting challenges posed by the Covid-19 outbreak, the outlook for the domestic economy has dropped.
“The external account is likely to face some pressure since almost 30% of Pakistan’s exports are concentrated in countries severely hit by the GHC (global health crisis). At the same time, remittances may also decelerate or even fall.”
The changing risk sentiment of global investors has resulted in net outflow of around $2.8 billion in foreign portfolio investment from the end of February to May 21, 2020. Exchange rate volatility has also increased considerably.
“The local currency depreciated 8.19% against the greenback during a short span of six weeks since the end of February 2020, though it partially recovered afterwards…by 5.90%.”
The Pakistan Stock Exchange’s (PSX) benchmark KSE-100 index touched a five-year low of 27,228 points on March 25 before making a comeback and recovering to the level of 33,931 points by May 29 “due to various policy stimuli and participation of investors to take benefit of low valuations”.
In such fluid times, SBP Governor Reza Baqir said, “it gives us some comfort that capital buffers built over the years have enhanced the resilience of the banking sector such that stress test results suggest the sector is relatively well placed to absorb the adverse shocks that could emanate from Covid-19.”
“Nevertheless, there remains considerable uncertainty about the future trajectory of the pandemic and its spillover effects on the economy and financial systems worldwide,” he added.
Protective measures
To help people and businesses avoid default on bank loans and reduce the risk of loss to banks, the central bank reduced the benchmark interest rate by a hefty 525 basis points during March-April to 8%.
Besides, it encouraged banks to defer loan repayments by one year. However, borrowers will continue to pay interest amount. In addition to that, the government has announced a relief package of Rs1.2 trillion ($8 billion) and the central bank has injected additional liquidity of around Rs1 trillion ($6 billion) to ease the pressure coming from Covid-19.
Accordingly, the fiscal account is likely to experience elevated pressure due to the rise in relief-related expenditures and anticipated decline in revenues due to slowdown in economic activity.
Covid-19 still unfolding
In Pakistan’s case, the impact of Covid-19 is still emerging. The government voices fear the health crisis will peak in July-August.
“Being a developing country already dealing with external and internal imbalances…, policy space is relatively limited compared to advanced economies,” the SBP report said.
“Due to widespread poverty, weak institutional infrastructure, insufficient health facilities and low levels of literacy and awareness amongst the public, the implementation of complete lockdowns for an extended period, though important, is practically challenging,” it said. “Therefore, the country is striving to strike a balance between health and economic concerns.”
“This could help provide support to the economic activity. Nevertheless, the situation remains uncertain and volatile.”
Baqir said “going forward, the recovery in the domestic economy will depend upon the severity and duration of the pandemic at home and abroad as well as the efficacy of containment and revival measures adopted.”
Published in The Express Tribune, June 17th, 2020.
The Covid-19 pandemic, which is still battering Pakistan’s economy, has put bank loans worth over Rs2.5 trillion at risk with decreasing resilience of small banks and mounting payment pressure on insurance firms while possibly denting the country’s exports by around 30%, the central bank reported.
“Highlighting the risk of deterioration in the financial health of their clients and its spillover effects, banks estimated around 28.52% (Rs2.51 trillion) of their advances (loans) on being at risk,” the State Bank of Pakistan (SBP) said in the Financial Stability Review - 2019.
Banks highlighted the risk in two surveys conducted by the central bank in March and April 2020 in order to assess financial implications of the Covid-19 pandemic and take relevant measures to mitigate the risk.
“The resilience of small-sized banks starts waning towards the end of the simulation period. Besides the banking sector, non-bank financial institutions could also face challenging conditions. For instance, the insurance sector could experience stress due to a rise in claims related to life and health segments,” it said.
“Moreover, the disruptions in supply and demand, caused by the pandemic, are likely to dent cash flows of the corporate sector, which may lead to a lower repayment capacity and put pressure on financial stability.”
With the persisting challenges posed by the Covid-19 outbreak, the outlook for the domestic economy has dropped.
“The external account is likely to face some pressure since almost 30% of Pakistan’s exports are concentrated in countries severely hit by the GHC (global health crisis). At the same time, remittances may also decelerate or even fall.”
The changing risk sentiment of global investors has resulted in net outflow of around $2.8 billion in foreign portfolio investment from the end of February to May 21, 2020. Exchange rate volatility has also increased considerably.
“The local currency depreciated 8.19% against the greenback during a short span of six weeks since the end of February 2020, though it partially recovered afterwards…by 5.90%.”
The Pakistan Stock Exchange’s (PSX) benchmark KSE-100 index touched a five-year low of 27,228 points on March 25 before making a comeback and recovering to the level of 33,931 points by May 29 “due to various policy stimuli and participation of investors to take benefit of low valuations”.
In such fluid times, SBP Governor Reza Baqir said, “it gives us some comfort that capital buffers built over the years have enhanced the resilience of the banking sector such that stress test results suggest the sector is relatively well placed to absorb the adverse shocks that could emanate from Covid-19.”
“Nevertheless, there remains considerable uncertainty about the future trajectory of the pandemic and its spillover effects on the economy and financial systems worldwide,” he added.
Protective measures
To help people and businesses avoid default on bank loans and reduce the risk of loss to banks, the central bank reduced the benchmark interest rate by a hefty 525 basis points during March-April to 8%.
Besides, it encouraged banks to defer loan repayments by one year. However, borrowers will continue to pay interest amount. In addition to that, the government has announced a relief package of Rs1.2 trillion ($8 billion) and the central bank has injected additional liquidity of around Rs1 trillion ($6 billion) to ease the pressure coming from Covid-19.
Accordingly, the fiscal account is likely to experience elevated pressure due to the rise in relief-related expenditures and anticipated decline in revenues due to slowdown in economic activity.
Covid-19 still unfolding
In Pakistan’s case, the impact of Covid-19 is still emerging. The government voices fear the health crisis will peak in July-August.
“Being a developing country already dealing with external and internal imbalances…, policy space is relatively limited compared to advanced economies,” the SBP report said.
“Due to widespread poverty, weak institutional infrastructure, insufficient health facilities and low levels of literacy and awareness amongst the public, the implementation of complete lockdowns for an extended period, though important, is practically challenging,” it said. “Therefore, the country is striving to strike a balance between health and economic concerns.”
“This could help provide support to the economic activity. Nevertheless, the situation remains uncertain and volatile.”
Baqir said “going forward, the recovery in the domestic economy will depend upon the severity and duration of the pandemic at home and abroad as well as the efficacy of containment and revival measures adopted.”
Published in The Express Tribune, June 17th, 2020.