February 22, 2021 (MLN): The upbeat momentum of workers’ remittances in Pakistan is credit positive for Pakistan's banks, as it supports deposit inflows and foreign-currency liquidity.
Higher household incomes because of remittances also create new lending opportunities for banks and support households’ debt repayment capabilities.
Moody’s in its latest report on Pakistan has stated increased remittances are credit positive for Pakistani banks, particularly United Bank Ltd (deposit rating and Baseline Credit Assessment: B3 stable, b3) which had a leading market share of around 24% of remittances as of 30 September 2020.
Moody’s also said, 24.1% to $16.5 billion increase in workers’ remittances for 7MFY21 is contrary to their expectation that the pandemic would keep remittances flat and the World Bank's forecast of a sharp decline in global remittances.
Increased remittances contribute to higher domestic deposits, providing banks with stable and low-cost funding while enhancing their foreign-currency liquidity. The deposit inflows will also mitigate the effect of government deposit outflows once the TreasurySingle Account, which requires federal government deposits to be placed with the central bank rather than commercial banks, is fully operational, says Moody’s Investors Service said in its credit outlook report.
It maintained that the increased remittances support Pakistani households’ disposable income and borrowers’ repayment capacity, reducing the potential for nonperforming loans (NPLs).
“Pakistani banks' consumer lending has historically outperformed lending to companies, and consumer loan NPLs accounted for 4.9% of gross loans as of 31 December 2020, compared with 9.4% for corporate loans,” it said. “Increased remittances and resulting higher household incomes are also likely to facilitate increased mortgage, small and midsize enterprise and agricultural lending, which are important components of the government’s financial inclusion targets.”
The Credit rating agency noted that greater use of digital channels, combined with the Pakistan Remittances Initiative2, which facilitates faster and cheaper remittance flows, fuelled increased remittances in recent years, while pandemic-related limitations on travel, including reduced travel to Saudi Arabia for the annual Hajj pilgrimage, have aided the sharp increase in remittances in recent months. Overseas Pakistani workers have saved more money and traveled less to Pakistan, increasing their capacity to remit via official sources. Similarly, overseas job losses as a result of the pandemic have led to increased repatriations.
The rating agency does not expect such high remittance growth levels to persist but believes remittances have the potential to increase in coming years, supported by the Pakistan Remittances Initiative and technical advances that materially reduce transaction costs, particularly for remittances through electronic and official channels.
Remittances from overseas Pakistanis residing in the Gulf states accounted for around 60% of the total inflows, followed by 13% from the UK, 9% from the European Union, and 9% from the US. According to World Bank estimates, Pakistan was the seventh-largest recipient of remittances globally in 2020, with remittance inflows comprising approximately 9% of GDP.
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