Financial system works well, remains resilient, reports FSR 2021

Financial market infrastructures (MFIs) remained resilient and continued to function effectively without any major disruptions, the State Bank of Pakistan’s (SBP’s) flagship publication, the Financial Stability Review (FSR), said on Tuesday. calendar year 2021.

The review presented the performance and risk assessment of various segments of the financial sector, including banks, non-banking financial institutions, financial markets, financial market infrastructures and non-financial corporations.

The FSR reported that the banking sector – the bulk of the financial system – recorded strong growth of 19.6% (CY20: 14.2%), 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 contained, with the gross NPL (non-performing loans) 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 front, revenue metrics saw improvement, with ROA (return on assets) coming in at 1% and ROE (return on equity) 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 found that the non-financial corporate sector showed marked improvement in profitability, turnover, efficiency and debt repayment capacity. While this improvement bodes well for credit risk in the financial system, it also signified a likely increase in business sector demand for financial products and services.

He said the central bank has 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 CY20 to provide a convenient means of digital banking services to the Pakistani diaspora, has crossed 416,000 accounts with a cumulative inflow of over USD 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 were 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 highlighted various measures taken by the SBP during the year to strengthen the regulatory and supervisory regime, including the introduction of a risk-based supervisory framework and a lender of last resort (LOLR) to strengthen its financial safety nets. Importantly, the amended SBP Act 1956 had clearly defined financial stability as one of the objectives of the SBP.

According to the report, risks to financial stability going forward would depend on the strength of external buffers, policy continuity and general macroeconomic conditions in the context of developments on the geopolitical front in Europe, global commodity prices commodities and global financial conditions.

Meanwhile, stress test results showed that the banking sector should maintain reasonable resilience against various hypothetical adverse economic shocks over the three-year projection period.

According to the review, in a dynamic and challenging environment both domestically and internationally, the SBP, for its part, would continue to take initiatives to keep pace with the changing financial landscape and remain alert to emerging risks, while standing ready to take the necessary measures to pursue its statutory objectives of price stability, financial stability and economic growth.

He said: “The global momentum assessment highlights that due to better management of the pandemic and an extensive vaccine inoculation campaign, the ensuing recovery in global economic activity that has started in the second half of CY20 continued in 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 highlighted that the national economy has weathered two waves of COVID-19 in calendar year 21 without significant impact thanks to effective management of the pandemic, which has facilitated a strong recovery in economic activity. .

GDP grew by 5.7% in FY21 (compared to a contraction of 1.0% in FY20), and momentum continued in FY22 to post estimated growth at 6.0%.

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 calendar year 21, while financial markets saw relatively contained volatility compared to last year.

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Don F. Davis