KARA CHI - The deposits of the Development Finance Institutions (DFIs) dipped by 1.25 per cent to Rs17.4 billion during July-September 2010 from Rs16.4 billion in the first quarter (January-March) of the same calendar year. These deposits provide less than 15 percent of the total funds of DFIs. The SBP in its latest Quarterly Performance Review of the Banking System stated that operating performance of DFIs remained relatively subdued in comparison with past two quarters of CY2010. The balance sheet of the DFIs experienced some contraction, while substantial increase in loan loss provisions of DFIs put strain on the profitability indicators; as ROA and ROE both declined. During the quarter, the balance sheet footing of the DFIs registered a decline of almost 8 per cent. On funding side, this decline was caused mainly by borrowings from financial institutions, which provide around two third of the total liabilities and are second biggest source of funds of the DFIs after the equity. According to the report, borrowings from financial institutions experienced a significant decline of around 20 per cent over the quarter. This significant decline in borrowings came particularly from the repurchase agreement (Repo) borrowings which hold significant share in the total borrowings. Funding volume reduced mainly in the investments; investment portfolio saw a dip of 13.2 per cent and its share in assets mix decrease by 3 percentage points. The disaggregated analysis show that decline in investments was largely shared by the MTB holdings, leading to 21 per cent decline in federal government securities, the report said. Gross advances of DFIs experienced a marginal decline of 0.84 per cent as stood at Rs43.4 during the quarter. This decrease in advances was shared by almost all sectors and segments. Textile and individuals (mortgage loans), however, gained some volume. The Consumer segment showed some growth in mortgage loans which represent the housing finance by a specialised DFI, it added. The report mentioned that asset quality of DFIs experienced further deterioration. The non-performing loans (NPLs) increased by 5.48 per cent, while classified investments grew by 5.74 per cent. Additionally a significant shift of NPLs from the Doubtful to Loss category increased the provisioning charge. Therefore, NPLs coverage ratio and Net NPLs to capital ratio also improved. As per the report revelations, operating performance of DFIs showed signs of slowing down due to surge in provisions charge. The income of DFIs increased by 75 per cent over the quarter, however, increase in provisions (which doubled over the quarter) not only dented the profitability but also lowered ROA despite contraction in bottom line of balance sheet. The increase in NPLs also had a negative impact on CAR, which declined by 40 bps. The report recommended: Majority of the DFIs are working as a joint venture between the government of Pakistan and respective foreign governments. However, the business model of these DFIs needs to be redefined. At present they are literally competing in the market with commercial banks. In longer run this competition might prove to be one-sided in favor of commercial banks. Ideally, the DFIs should provide facilities for long term projects related to infrastructure and venture capital.