KARACHI - The asset base of the Development Finance Institution (DFIs) posted 3.1pc growth to reach Rs106.8 billion during the first quarter of calendar year 2009. Asset composition of DFIs indicates that their investments and advances account for 76.7pc of their total assets (72pc in Dec-08). During the quarter, the earning assets portfolio witnessed significant shift from bank balances and lending to financial institutions to investments, which increased by 18.3pcage points on YOY basis. As a result, the share of investment portfolio increased by 5.4pcage points to 42.4pc. During the quarter, DFIs advances portfolio registered a marginal increase of 1.1pc during the quarter (1.9pc YOY basis) and reached Rs36.6 billion. Lending to financial institutions contracted sharply with its share in total assets receding by 1.3pcage points to 8.8pc (13.8pc Mar-08). Break-up of investments compiled by SBP indicates that the DFIs investments in government securities have substantially increased over the last year. Govt papers account for 41.5pc of total investments, compared to 16.6pc in March 2008. Investments in corporate debt instruments (TFCs/PTCs) have remained around 20.8pc. The sharp increase in investment in government securities is consistent with the risk aversive approach adopted by the financial sector in the wake of loan losses and building credit risk pressures. Investments in quoted shares, on the other hand, have dropped to 24pc compared with 39pc in Mar-08 because of both volume and value losses in the stock market. SBP data said that loan portfolio of DFIs registered a marginal growth of 1.1pc over the quarter under review (1.9pc YoY). However, due to decline in balances with banks and lending to financial institutions, share of loans in their overall assets reached to 34.3pc from 32pc in Mar-08. Equity and borrowings from financial institutions remained the main sources of funding for DFIs and accounted for 85pc of the asset base. Inclusion of two new DFIs in CY08 as well as significant capital injections made by other institutions has made equity the largest source of funding at 48pc of asset base (42.7 in Mar-08). Borrowings as apcage of total assets registered a 4.5pcage points decline to 37.1percent; during the quarter, on the other hand deposits/COIs which have been declining since CY05 increased to Rs.10 billion enhancing their share in overall assets from 5.7pc to 10pc during the quarter. A comfortably strong capital base provides sufficient cushion to withstand unexpected losses from business operations. As a result of progressive capital injection over the last few years, entry of new institutions, increase in investments in risk-free Government papers, capital adequacy indicators of DFIs have improved. CAR improved to 56.1pc in Mar-09 from 49.8pc in Dec-08 (45.3pc in Mar-08). Similarly Tier-I capital to RWAs ratio too increased by 4.9pcage points to 55.6pc over the same period (44.8pc in Mar-08).The noticeable increase in the equity of the DFIs is also evident from the improved capital to asset ratio, which improved to 48.1pc from the level of 42.7pc in Mar-08. The ratio has improved since CY05 when it was 36pc. Asset quality indicators however, continue to deteriorate due to worsening business environment. Non-performing loans of DFIs registered an increase of 8.1pc to Rs.12.7 billion (Rs.8.3 billion Mar-08). As a result NPLs to Loan ratio increased by 2.2pc to 28.2pc over the quarter. However, due to partial provisioning coverage of fresh NPLs, the Net NPLs increased at swift pace, net NPLs to Loan ratio increased by 3pcage points to 12pc. The deterioration of asset quality indicators does not augur well for the profitability of the DFIs. With increased provision charges and dry spells in the capital market, the quarter under review remained uneventful for the DFIs with regard to profitability. Profit before tax stood at Rs. 316m against Rs. 7,418m in the corresponding period of Mar-08. (Rs.4,272m in CY08). The ROA before tax declined from 3.9pc in Dec-08 to 1.2pc in Mar-09. Similarly, the ROE before tax declined from 8.8pc in Dec-08 to 2.5pc in Mar-09. The tax impact further dampened the earnings which translated into the loss after tax of loss stood at Rs 0.1m.