Impact of COVID-19 Pandemic: Government Relief Package and the Likely Mis-Allocation of Loans in Pakistan

Sharif, S. (2020), Impact of COVID-19 Pandemic: Government Relief Package and the Likely Mis-allocation of Loans in Pakistan. Sindh Economics and Business Review International (SEBRI), Volume 1, Issue 2, pages 1-10.

9 Pages Posted: 14 Apr 2020 Last revised: 6 Oct 2020

See all articles by Saqib Sharif

Saqib Sharif

Institute of Business Administration, Karachi

Date Written: April 10, 2020

Abstract

This study argues the likely misallocation of capital in Pakistan associated with the perverse incentives faced by banking institutions to provide additional loans to weak businesses and households. Businesses and households are more likely to receive additional bank financing if they are financially constrained, because: (a) financial intermediaries in Pakistan have an incentive to allocate funds to weaker borrowers in order to avoid the realization of non-performing loans on their financial statements; and (b) the financial regulator’s relief package for commercial banks to sidestep deleveraging that will hamper economic growth arising from COVID-19 pandemic. This study hypothesizes that a potential ‘ever-greening’ behavior would be more observable among financial institutions that have capital adequacy ratios close to regulatory minimum requirement; and the policy of forbearance on extending funds by banks will be compounded due to the existence of deposit insurance scheme. However, the evidence suggests that banking institutions in Pakistan have not adopted the policy of forbearance despite announcement of incentives by State Bank of Pakistan (the central bank) - commercial banks prefer to park their excess liquidity in government securities in the face of global pandemic. Moreover, the findings of this study are not conclusive due to the availability of aggregate commercial banks data and short sample period.

Keywords: COVID-19 Pandemic, Pakistan Banks, Financial Regulation, Perverse Incentives, Deposit Protection Scheme, Capital Adequacy Ratio

JEL Classification: E44, E51, G21, G28

Suggested Citation

Sharif, Saqib, Impact of COVID-19 Pandemic: Government Relief Package and the Likely Mis-Allocation of Loans in Pakistan (April 10, 2020). Sharif, S. (2020), Impact of COVID-19 Pandemic: Government Relief Package and the Likely Mis-allocation of Loans in Pakistan. Sindh Economics and Business Review International (SEBRI), Volume 1, Issue 2, pages 1-10., Available at SSRN: https://ssrn.com/abstract=3572718 or http://dx.doi.org/10.2139/ssrn.3572718

Saqib Sharif (Contact Author)

Institute of Business Administration, Karachi ( email )

IBA Main Campus,
University Road,
Karachi, Sindh 75270
Pakistan
+922138104700 (Phone)

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