Bank liabilities outgrow assets in FY21

Banks have gradually increased their dependence on borrowed money to continue performing their operations over the past one year, as requirement for money to meet the demand of depositors and borrowers went up amid Covid-19 in Pakistan.

Accordingly, the size of banks’ liabilities has grown at a faster pace than their assets, slashing their net worth in the fiscal year 2020-21 compared to the preceding fiscal year 2019-20.

Bank borrowing from the State Bank of Pakistan (SBP) and the inter-bank channels shot 43.6% to Rs4.26 trillion in FY21 compared to Rs2.97 trillion in FY20, according to Pakistan central bank’s data uploaded on Friday.

Interestingly, the borrowing by banks went up notably despite the fact that deposits of bank accountholders rose by just 17.5% to Rs20.44 trillion over the past one year, suggesting there was ample liquidity available in the banking system to meet its clients’ requirement.

The increased borrowing, in addition to growth in deposits, played a key role in widening liabilities sharply by 20.1% in FY21 compared to 13.4% in FY20. On the other hand, the assets also surged 18.9% in FY21 compared to 14.4% in FY22, but the pace of growth in assets was lower compared to liabilities.

AHL Research Economist Sana Tawfik said that borrowing by banks increased as the central bank kept in view the outlook for increased demand for money in the system during the two Eid festivals that took place in May and July 2021.

She said that the receipt of workers’ remittances from overseas Pakistanis have continued to play a key role in enhancing deposits of bank accountholders.

“The occurrence of Eid festivals in recent months, however, slowed down the remittances on the back of prolonged holidays in the two months in Pakistan and in Gulf countries where majority of Pakistanis live,” she said.

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The receipts of workers’ remittances has remained robust and over $2 billion per month were received under this head for the past 14 months. They grew strongly by 27% to $29.1 billion in FY21.

According to her, the remittances were expected to remain strong going forward and they would continue to play a vital role in lifting banking deposits to the next level.

She said that enhanced borrowing by banks does not mean that they have increased level of risk in doing business.

“They have apparently borrowed from the central bank (which is a regulator as well) which carries almost no risk,” she said.

She said that the growth in assets come with a slight delay compared to growth in liabilities in the set data. Therefore, assets are expected to rise next time when the central bank will update the data for the quarter (July-September 2021) compared to their current size.

The central bank’s data suggests that the rate of growth in bank’s lending to the government (net investment) has slowed down in fiscal year 2021 compared to the preceding fiscal year 2020. On the other hand, the rate of growth in banks’ credit to the private sector (net advances) has paced up in FY21 compared to FY20.

The banks’ advances (credit to the private sector) are strongly expected to grow, going forward, as the government and the central bank have given advances targets to banks. “In case, they fail to meet the targets, they would be subjected to pay higher effective tax rate,” she said.

She said that the hike in tax rates came into effect from July 1. The government and the banks are yet to finalise as increased rate of taxes would be applied to the net profit or the income to be generated in shape of interest money.

Published in The Express Tribune, August 29^th, 2021.

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