But this contraction in the private sector borrowing led to compromise on industrial expansion that directly hit the job market in country. The bank interest rate also remained at the lowest level after four decades, mainly because of drop in the oil prices, resulting in low inflation and ultimately the lowest interest rate regime.
Sales in the auto industry registered a phenomenal 60-percent growth because of low interest rate. Leasing of automobiles remained phenomenal and Honda has decided to invest another $100 million in Pakistan. "Consumer financing remained phenomenal against industrial financing throughout 2015, particularly due to energy constraints," said industry sources. The banking sector investment in T-bills, investment bonds and other financial instruments helped the banking sector to reap windfall profits throughout 2015.
But financial analyst Asif Baig Mirza says the lowest regime of interest rates has almost been bottomed out and further gains on these counts will remain difficult in 2016 ahead.
"The banking sector has enjoyed a gap of five percent in deposit and lending rate following unprecedented exposure to financial instruments of the government," he adds. Privatisation of banks has helped the industry to improve efficiency level, professionalism, technology up-gradation, performance and resource mobilisation. "There was an eight-and-a-half-percent increase in deposits, which have crossed Rs 9 trillion today," he says. "An increase in competition has been witnessed with expansion of the banking industry in Pakistan. Therefore, increasing profitability further will be challenge for banks now."
He says excessive lending to the banking sector has exposed the banking industry to concentration risk and it will be difficult to meet abrupt liquidity requirements, if any, in 2016. "The vulnerability of the banking sector in Pakistan has increased because of a limited scale of borrowers."
They have further pointed out that imposition of 0.3 percent withholding tax on withdrawal by the non-filers has also led to reported withdrawal of tens of billions of rupees in later half of 2015, which may again hit the liquidity position of many banks until the government takes a corrective measure. Another banking sector analyst says only seven percent of the people of Pakistan are involved in banking, which is discouraging.
"India has recently created history by pursuing the public to open up 15 million accounts in one day, followed by life and health insurance at a cheaper rate," he said. "Similar incentive should be offered here in Pakistan to promote banking among the masses. There is a potential of 20 percent growth on this count, which will translate into further growth of 3 percent in banking activities."
The financial sector experts have also paid kudos to the State Bank of Pakistan for announcing moratorium for the KASB Bank in the larger interest of its depositors. It also pushed a few more banks to get merged to meet paid up capital requirement. They have lauded the expansion of Islamic banking throughout 2015 and stressed on structuring Islamic products to use liquidity pool.
They have also hailed the privatisation of the Allied, Habib and United banks throughout stock market, saying it has not only assured transparency to the privatisation process but also helped secure the rights of depositors. They say they hope that this single step will also lead to better governance in these public sector entities. However, they warn that the end of "the honeymoon period" is probably nearing on mid-term basis.