FSR for CY21 unveiled: financial system performed well: SBP

KARACHI: Despite the economic challenges inherited from the past and uncertainties surrounding the trajectory of the pandemic, Pakistan’s financial sector has not only performed well but also supported the economic recovery with an uninterrupted supply of credit and financial services over the past the last calendar year (CY21).

According to the State Bank of Pakistan’s annual flagship publication, the Financial Stability Review (FSR) for CY21, released on Tuesday, the financial sector has continued to show financial and operational resilience over the past calendar year and the basis of consolidated assets of the sector increased by 15.6. CY21 compared to 14.0% growth in the previous year and financial depth in terms of financial sector assets to GDP ratio stood at 63.9%.

The Global Momentum Assessment highlights that due to better management of the pandemic and an extensive vaccine inoculation campaign, the recovery in global economic activity that began in the second half of CY20 continued during CY21. However, supply chain disruptions fueled inflationary pressures and recurring waves of new COVID-19 variants continued to pose challenges to global economic activity and financial markets.

The review highlights that the national economy went through two waves of Covid-19 in calendar year 21 without significant impact thanks to effective management of the pandemic, which facilitated a strong recovery in economic activity. GDP grew by 5.7% in FY21 compared to a contraction of 1.0% in FY20, and the momentum continued in FY22 to post an estimated growth of 6 .0%.

SBP raises its key rate by 150 basis points to 13.75%

However, the vigorous recovery in demand and the rise in international commodity prices, particularly oil, put pressure on the external accounts. Accordingly, the SBP has taken a number of macroprudential and monetary policy measures to stabilize the external account, moderate domestic demand and address associated risks.

Against the backdrop of strong economic expansion, the financial sector has shown steady performance while its financial and operational resilience has remained intact. The financial sector’s asset base grew by 15.6% in year 21, while financial markets saw relatively contained volatility compared to last year.

The FSR indicates that the banking sector, the bulk of the financial system, recorded strong growth of 19.6% compared to 14.2% during CY20, which was particularly helped by an increase in advances from the private sector. The expansion was well supported by healthy deposit growth of 17.3%, while banks also increased their reliance on borrowing from the banking system.

Encouragingly, credit risk in the banking sector remained under control, with the gross NPL ratio declining by 130 basis points to 7.9%, while the provision coverage ratio improved by 291 basis points to 91.2%. As a result, the net NPL ratio decreased to 0.7%, indicating a lower residual risk for the solvency of delinquent loans.

On the performance side, revenue metrics saw an improvement, with ROA standing at 1.0% and ROE improving at 14.1%. Due in part to improved earnings, bank solvency remained strong, as evidenced by the high capital adequacy ratio of 16.7%, which remained well above the regulatory benchmark national minimum of 11.5% and the international benchmark of 10.5%.

The Islamic banking segment also recorded strong performance with a 30.6% increase in its asset base in year 21, increasing its share by 160 basis points to 18.6% in the banking sector. Microfinance banks, which showed reasonable growth, observed an increase in the infection rate and a deterioration in income indicators. From a demand perspective, the FSR reveals that the non-financial corporate sector has seen marked improvement in profitability, turnover, efficiency and debt repayment capacity. While this improvement bodes well for credit risk in the financial system, it also signifies a likely increase in business sector demand for financial products and services.

The report notes that financial market infrastructures (FMIs) remained resilient and continued to function effectively without any major disruptions. The SBP launched Pakistan’s instant payment system, Raast, which marked a major step towards the implementation of the national payment systems strategy. Since launching its P2P component in February 2022, the number of Raast ID registrations has surpassed the 10 million mark, with an aggregate transaction value exceeding PKR 36 billion.

Similarly, the Roshan Digital Account initiative, which was introduced at the end of calendar year 20 to provide a convenient means of digital banking services to the Pakistani diaspora, crossed 416,000 accounts with a cumulative inflow of more than 4 .4 billion at the end of May 2022.

Similarly, a comprehensive digital customer onboarding framework has been introduced to enable resident Pakistanis to open bank accounts remotely. These initiatives are also expected to play a key role in improving financial inclusion in the country. To respond to cybersecurity risk, which is primarily associated with the increasing use of technology and the changing landscape of digital payments, SBP has taken various actions during the year to build industry resilience in the face of at risk.

The review also highlights various steps taken by SBP during the year to strengthen the regulatory and supervisory regime, including the introduction of a risk-based supervisory framework and a credit lender facility. last resort (LOLR) to strengthen its financial safety nets. It is important to note that the amended SBP Act 1956 clearly defined financial stability as one of the objectives of the SBP.

Copyright Business Recorder, 2022

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Don F. Davis