ISLAMABAD: The sovereign exposure of Pakistan’s banking sector increased from 48% in fiscal year 2020-21 to 51.8% in fiscal year 2022-23.
Increase in the sovereign exposure of the banking sector came on the back of increased borrowing by the government. In FY23, the government’s borrowing accounted for 50% of the banking sector’s total loan receipts.
Sovereign exposure is a ‘debt obligation’ of, and off-balance sheet exposures to a sovereign (a country), its central bank, regional governments and local authorities, claims on which are treated as claims on sovereigns under the Standardised Approach; multilateral development banks (MDB) and international organisations, claims on which receive a 0% risk weight under the Standardised Approach.
Also, in FY23 the capital adequacy ratio (CAR) of the banking sector increased to 16.3%, five percentage points higher than the regulatory limit of 11.5%. This regulatory minimum also includes the 1.5% capital conservation buffer (CCB).
The CAR is an indicator of how well a bank can meet its financial obligations. It is also known as the capital-to-risk weighted assets ratio (CRAR).
This ratio compares capital to risk-weighted assets. It is closely watched by the regulators to determine a bank’s risk of failure. It is used to protect depositors and promote the stability and efficiency of financial systems around the world.
In March 2020, the State Bank of Pakistan reduced the CCB from 2.5% to 1.5% as a relief measure in view of the Covid-19 pandemic. Presently, there are four banks with assets worth 2.2% of the total banking sector assets with CAR below the regulatory minimum of 11.5%.
If the minimum CAR of 12.5% was restored as before the pandemic, when it accounted for 2.5% of CCB, one more bank would fall below the regulatory threshold minimum, thus improving the outlook of the banking sector.
State Bank of Pakistan is set to undertake a review of the existing policy with a view to restoring the old CCB in the ongoing quarter of FY24.
In addition, the non-performing loans (NPLs) increased by 7.8% and the provisioning of NPLs reached 90.7%.
The data by the International Monetary Fund also showed that NPLs of 11 out of 32 banks had increased beyond 10%, which indicates the increasing frequency of bad loans that the banks had forwarded to various public and private entities and, which were now non-retrievable.
The economic downturn has made it imperative that the regulatory bodies take resolute action to make sure that the banks maintain the minimum required capital levels.
Similarly, any shortfalls in capital and regulatory non-compliance should be addressed through time-bound recapitalisation plans or in the worst-case scenario, an orderly exit from the market.
Also, the high levels of NPLs in some banks should be taken care of through bank specific plans and the writing-off of fully provisioned loans should also be allowed. –INP
