The shift to non-bank borrowings

IN an effort to cut excessive borrowings from banks, the government is trying to raise debt from non-bank sources. The latest major step in this direction in December last was to allow individuals to invest in treasury bills. Bankers say, between January and March, roughly 10 per cent of the government borrowings through T-bills sold to individuals form part of its nonbank borrowing. In the last quarter, investment by individuals stood at around Rs104 billion in gross T-bills sales of Rs1042 billion, treasurer of a large local bank told Dawn. Individuals investment in long-term Pakistan Investment Bonds during this period totaled Rs2.2 billion or about five per cent of their overall sales of Rs43 billion. Late last year, the State Bank of Pakistan made it mandatory upon primary dealers to open Investor Portfolio Securities (IPS) accounts to facilitate individual account holders to invest in T-bills and PIBs. Primary dealers are the banks and financial institutions that are selected by SBP and allowed to participate directly in the auctions of government treasury bills and bonds. The central bank also allowed all other banks to offer IPS accounts to their clients. Banks feared that this might result in shifting of a part of bank deposits to IPS so they did not show much interest in publicising this scheme, admitted head of a local commercial bank. But yes, many high net worth individuals including bankers themselves have since been investing in T-bills and PIBs. Queries revealed that most of bank brancheseven those of primary dealers either do not have full information on how to open IPS accounts or how to operate them. Or in some cases officials at bank branches are least interested in providing practical guidance to account holders interested in IPS. I think the government and the SBP must launch a publicity campaign to educate people about it, remarked a retired central banker. In mid-2000s individual investment was allowed in PIBs but the scheme was not much publicised and at the end of the day it proved a non-starter, he recalled. That is why IPS has now been introduced to enable individual investors to invest not only in T-bills but also in PIBs. Bankers say that government organisations like Employees Old Age Benefit Institution and State Life Insurance Corporation plus pension and provident funds

of private sector corporates also continue to park long-term funds in PIBs because these are zero-risk bonds. And that constitutes government borrowing through non-bank sources. But they point out that financial bleeding in public sector enterprises and low coupon rates on PIBs have robbed them of their charm. Earlier PSEs like Pakistan Steel and PIA were among corporate investors of PIBs. But PIBs retain some value in terms of government borrowing from non-bank sources. Effective annual rates of return on PIBs of three to 10 year maturities remain a few basis points above 14 per centslightly higher than the yield on six-month T-bills. Obviously, PIBs cannot attract sizable funds unless their returns improve. That seems impractical at the moment because the government would not like to increase the cost of internal debt payments as it is already struggling to contain fiscal deficit, commented head of another local commercial bank. But if fiscal deficit can be brought down in the first quarter of the next fiscal year, the governments short-term bank borrowing requirement would be less and Tbills yields would decline slightly. That, in turn, should make PIBs attractive for investors. As for investment in Ijara Sukuk or Islamic bonds, bankers say that the largest chunk of it comes from Islamic banks and thus forms part of the government borrowing from banking sources. But now corporate investment is also coming in, says a senior official of Meezan Bank. There are some business groups that are switching over from conventional banking to Islamic banking. It is quite natural for them to invest in Ijara Sukuk, he said. Besides, many other corporates (and those are in majority) that rely on both conventional as well as Islamic banking are also showing interest in Sukuk as the market is becoming more familiar with these Islamic bonds. Bankers guesstimate that up to 10 per cent of total investment made in Ijara Sukuk should be coming from corporate sector. Obviously this too is helping the government in its drive to increase borrowing from non-bank sources. Islamic bankers say in addition to some selected business groups, foreign exchange companies also use Sukuk for maintaining their statutory liquidity requirements. After witnessing some decline in the first half of the current fiscal year, investment in National Saving Schemes has also rebounded. Cumulative investment in NSS

in January-February 2011 expanded about 80 per cent to Rs61.4 billion from Rs33.7 billion in the same period of 2010. If this trend continues, and officials believe it should, it too would enhance the share of non-bank borrowing in the overall mix of government borrowings. Officials of Central Directorate of National Savings say a scheme will soon be launched to encourage overseas Pakistanis to make investment in NSS in foreign currencies. Besides, they say that new short-term saving products are also in the pipeline. Separately, plans to offload part of the government holdings in state-run organisations are being also finalised which too should help reduce reliance on borrowing from the banking system. Various moves made by the government to borrow more through non-bank sources would help in keeping inflation in check besides promoting domestic savings. More importantly it would cut through some layers of currency in circulation or money outside the banking system which, in turn, would help in documenting the economy, said a senior SBP official. And in very short term, it would save the private sector from being crowded out. Though banks lending to private sector so far this fiscal year has been higher than in the last year, expansion in credit volumes has more to do with higher commodity prices rather than banks ability to reach out to new borrowers. The State Bank has already warned the government to contain its borrowings from banks to create more room for growth in private sector credit. Now, we are also engaging banks in serious discussions over this issue, said the SBP official, adding that if moral suasion does not work, the central bank may have to find other ways to discourage overexposure of banks in government securities.