Majority of the businesses faced a tough battle amid the Covid-19 outbreak but banks thrived as deposits soared significantly to record high of over Rs16 trillion, while lending to the government peaked close to Rs11 trillion during the health crisis in Pakistan.
Banks deposits grew by Rs1.3 trillion during the challenging March-July 2020 period to Rs16.12 trillion. They peaked at Rs16.22 trillion in June 2020, the State Bank of Pakistan (SBP) reported on Wednesday.
“The deposits have increased with receipt of record high workers’ remittances of $23.10 billion in the previous fiscal year 2020 (ended June 30),” Economist Shahid Hasan Siddiqui said while talking to The Express Tribune.
Overseas Pakistanis send remittances to their family members and friends back home in foreign currencies while domestic banks transfer the remittances to the local recipients in rupee-denominations. Accordingly, the foreign inflows help grow the deposits, he said.
Pakistan received record high workers remittance at $23.1 billion in FY20 and $2.76 billion in the first month (July) of the current fiscal year 2021, according to the central bank.
Next Capital Managing Director Muzammil Aslam said, “The deposits have grown mainly due to award of the government’s relief package for people and business to cope with the Covid-19 situation as people lost jobs and businesses remained closed in wake of the lockdown.”
“Government announced stimulus package worth Rs1.2 trillion to relieve people and businesses. People used the money to buy essential items like kitchen goods and grocery, while the government paid three-month electricity bills of small and medium enterprises (SMEs) under the package.”
Accordingly, the money ultimately reached banks and reflected in deposits, he added.
Besides, the central bank injected another Rs1 trillion into the system through various schemes to help businesses retain employees and pay them monthly salaries, for health projects to fight better against Covid-19 and to set up new businesses to create new employment opportunities during the crisis.
The deposits stood at Rs13.74 trillion a year ago in July 2019, according to SBP.
Investment peaks
Similarly, the banks’ investment in government papers such as T-bills and Pakistan Investment Bonds (PIB) increased by Rs2 trillion to a record high of Rs10.80 trillion in July compared to Rs8.72 trillion in February when the first Covid-19 infection case was reported in Pakistan.
The government utilises the money received through auction of T-bills and PIBs to overcome shortfall in the budgeted expenditure. The low collection of taxes keeps the budget and fiscal deficit on the higher side and the government relies highly on commercial borrowing to bridge the twin deficits.
The government’s need for money remained high during the pandemic as it announced relief package worth Rs1.2 trillion to cope with the situation.
“This situation increased government’s borrowing from commercial banks,” Aslam said.
Siddiqui, however, appeared highly critical of the banks and noted they had adopted the policy of earning easy money by making safe lending to the government instead of making risky lending to manufacturing and agriculture sectors.
He added that it was not only during the Covid-19 period when banks lent accountholders’ deposits to the government to earn high profits and they had been doing so since major banks got privatised in 2004 and 2008.
He also criticised banks for sharing lesser profit with accountholders. Banks used to pay higher profit to the accountholders some years ago, he said.
The investment stood at Rs8.73 trillion in July 2019, according to the central bank.
Advances drop
Banks’ lending to the private sector, however, reduced during Covid-19 as majority of the businesses were lying closed under the lockdown.
Secondly, businesses, mainly the textile ones, made fresh borrowing during August and September when they bought cotton for the whole year. They kept retiring the borrowing from January-February and onwards. “Coincidently, Covid-19 emerged at a time when businesses retire banks’ borrowing,” Aslam said.
The advances to private sector dropped to Rs8.11 trillion in July compared to Rs8.21 trillion in February. The advances continued to fluctuate between Rs8-8.35 trillion since October 2019. The advances stood at Rs7.99 trillion in July 2019, according to SBP.
Published in The Express Tribune, August 20th, 2020.
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