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Thursday, February 15, 2024

Moody’s says remittances growth is credit positive for Pakistan’s Banks

Moody's says that the increased remittances are credit positive for Pakistani banks. This will help the growth of the supply and demand sector of the financial sector of the country.

Credit rating agency Moody’s says that state bank’s new measures are incentivizing an increase in remittances in Pakistan. Albeit the fact that the agency thinks that this trend will not persist, it is good for the banks in Pakistan.

This came after the State Bank of Pakistan (SBP) revealed of February 15th that the 7MFY21 from July to January saw a 24.1% increase in remittances to $16.5 billion.

“The increase is credit positive for Pakistan’s banks. The increase is also contrary to our expectation that the pandemic would keep remittances flat and the World Bank’s forecast of a sharp decline in global remittances.” Moody’s said.

The report particularly mentions that it is good for United Bank Limited (UBL), which had the leading 24% of the market share of remittances due to the services it offers. This is because UBL supports foreign currency inflows and foreign currency liquidity options.

This increase is contrasting the forecast by the State Bank of Pakistan and World Bank, which stated that the remittances would have remained flat or would have seen a sharp decline, respectively.

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According to SBP, a large part of workers’ remittances during July-Jan FY21 was sourced from Saudi Arabia ($4.5 billion), United Arab Emirates ($3.4 billion), United Kingdom ($2.2 billion), and United States ($1.4 billion).

Remittances lead to higher household income and higher domestic deposits in banks, which would lead to greater lending opportunities for the bank and support loan repayments by households. This reduces the chance of Nonperforming loans (NPLs).  According to the report, Pakistani banks’ consumer lending has historically outperformed lending to companies, and consumer loan NPLs accounted for 4.9 percent of gross loans as of 31 December 2020, compared with 9.4 percent for corporate loans.

According to Moody’s, increased remittances and the resulting growth in household incomes are also likely to facilitate increased mortgages, small and midsize enterprises, and agricultural lending, which will lead to financial inclusion.

Moody’s commented that the greater use of digital channels, combined with the Pakistan Remittances Initiative which facilitates faster and cheaper remittance flows, fueled increased remittances in recent years.

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The report suggested that overseas Pakistani workers have saved more money and traveled less to Pakistan, thus increasing their capacity to remit via official sources. The pandemic has also reduced traveling to the holy sites in Saudi Arabia, leading to higher disposable income for overseas Pakistanis.