Bank deposits grow 20% to Rs16.66tr

Deposits are mainly used to meet govt financing needs; private sector lags behind

Bank deposits grew 20% over a year and reached Rs16.66 trillion in October 2020, according to data released by the central bank. Such deposits had amounted to Rs13.91 trillion a year ago in October 2019.

Banks have largely used the deposits to meet financing needs of the government as the private sector remains reluctant to borrow for business expansion or setting up new ventures in these challenging times under the Covid-19 pandemic.

“Key sources of higher deposit growth are increase in money supply (17% year-on-year) and rise in bank deposits of individual accountholders (predominantly the salaried class which account for 14% of total deposits),” JS Research analyst Amreen Soorani said in a commentary.

Bank deposits have been mostly utilised to finance government projects as it falls short of required funds for development and non-development projects from its own resources due to low tax collection.

Banks primarily lend to the state through investment in government securities like treasury bills and Pakistan Investment Bonds (PIBs).

“Fresh deposits were utilised for expanding the investment portfolio (T-bills and PIBs), which grew 38% year-on-year to Rs10.94 trillion, pushing investment-to-deposit ratio (IDR) up by nine percentage points to 66%,” Soorani said.

“In the same period, the government’s net borrowing from the banking sector increased 47% year-on-year while total government net borrowing rose 18% year-on-year (as on October 23).”

On the other hand, the total loan portfolio (of the private sector) remained broadly unchanged, with advances-to-deposit ratio (ADR) going down by nine percentage points to 49%, she said.

The contraction in ADR came in the wake of a significant surge in deposits with almost no growth in loans to the private sector over the past one year. Loans to the private sector stood at Rs8.11 trillion in October 2020 compared to Rs8.01 trillion in the same month of last year, according to the State Bank of Pakistan (SBP).

“We expect the sector (banks) to continue to prefer parking fresh deposits in government papers for the remainder of CY20 with 18-20% year-on-year growth in total deposits likely in ongoing calendar year 2020,” said the JS Research analyst.

“We expect a rebound in loan disbursements (to the private sector) from next calendar year 2021 onwards,” she said.

Arif Habib Limited Head of Research Tahir Abbas said the private sector had been largely reluctant to borrow for new projects or for expanding existing production capacity at a challenging time.

Although business activities had been on the rise for the past couple of months, businesses avoided expansion keeping in view the likely second wave of Covid-19 in Pakistan, he said.

“The textile sector is more likely to invest in business expansion as the government is focused on increasing exports,” he said.

Textile remains the largest export earning sector of Pakistan. The government has slashed power tariff for industries by 30% to make manufacturing and export sectors viable. Secondly, the government is highly focused on fulfilling the promise of facilitating the housing and construction sector. This should encourage some of the construction and allied industries to go for expansion through bank financing.

“Businesses may continue to hold back new investment decisions till clarity emerges on the Covid-19 front,” Abbas said.

Experts voice hope US and UK-based firms may successfully introduce a vaccine for Covid-19 by December 2020 but it may take one more year to make the vaccine available to people around the world.

The introduction of the vaccine may, however, give confidence to businesses to focus on their future.

Published in The Express Tribune, November 6^th, 2020.

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