Deposits in banks dropped 2.4% (or Rs485.5 billion) in a month to Rs19.4 trillion by the end of October 2021, after financial institutions apparently adopted a strategy to slash the deposits to avoid paying an additional tax.
“The financial institutions are, however, set to review the deposit reduction strategy and initiate a ‘deposits war’ in the wake of a one-percentage-point hike in the cash reserve requirement (CRR) to 6%,” said Arif Habib Limited (AHL) economist Sana Tawfik.
CRR is the amount parked by commercial banks with the central bank at zero return. “In the meantime, the central bank has made it mandatory for banks to pay a minimum 7.25% profit on deposits in saving accounts,” Tawfik said while talking to The Express Tribune.
The overall bank deposits had stood at Rs19.8 trillion at the end of September 2021, according to State Bank of Pakistan’s (SBP) data.
Earlier, the government told the banks that they would have to pay an additional tax if they failed to increase their advance (credit to the private sector) to deposit ratio (ADR) to more than 50% with effect from July 1, 2021.
“They opted to cut their deposits instead of increasing advances to meet the government condition of advance-to-deposit ratio,” she said.
“Banks had started offering an unattractive rate of return on saving accounts to discourage the accountholders from depositing funds, as they did not find increasing credit flow to the private sector feasible considering the outlook of economic activities in the country,” she said.
Banks are now subject to pay an additional 5% tax in case their ADR stays below 40% and have to pay 2.5% additional tax if the ADR remains between 40% and 50%.
“There are only a couple of banks that meet the mandatory ADR condition,” she said.
“A majority of them prefer to invest their deposits in the risk-free debt securities of the government like T-bills and Pakistan Investment Bonds (PIBs) instead of taking the risk of increasing advances to the private sector.”
The banks’ deposit reduction strategy worked as the ADR ratio increased 1.71 percentage points to 49% in October.
The ratio, however, dropped 14 basis points compared to the same month of last year.
The strategy encouraged account holders to keep cash in hand and spend more, which was one of the reasons for the acceleration in inflation reading.
Accordingly, the central bank increased the CRR and raised the minimum rate of return on saving accounts to 7.25% to encourage the accountholders to deposit more money in banks and reduce the circulation of money in the economy, Tawfik said.
The central bank increased the minimum savings rate after hiking the benchmark interest rate by 1.5 percentage points to 8.75% on Friday last week (November 19).
Banks did not reduce their deposits in just one month as the deposits had been slowing down for the past few months.
Moreover, the impact of an increase in the CRR is yet to be witnessed as the CRR was increased in the current month.
The increase in CRR, higher return on savings and additional tax are set to trigger a deposits war among banks. Workers’ remittances from overseas Pakistanis were a big reason for notable growth in bank deposits over a period of time.
“The inflow of remittances slowed down 5.7% (or $152 million) to $2.5 billion in October compared to the previous month,” she said. “The slowdown also contributed to the slow growth in deposits.”
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Yearly figures Over the past one year, the deposits at banks surged significantly by 16% to Rs19.4 trillion largely in the wake of aggressive growth in inflows of workers’ remittances, she said.
Banks’ investment in the government debt securities like T-bills and PIBs also slowed down 2.1% to Rs13.8 trillion in October compared to Rs14.1 trillion in September.
The investment in securities remains a way of lending to the government for budgetary borrowing.
The investment increased significantly by 26% to Rs13.8 trillion in October 2021 compared to Rs10.9 trillion in October 2020.
Accordingly, the investment to deposit ratio (IDR) increased to 71% in October, up by 5.66 percentage points year-on-year and 23 basis points on a month-on-month basis.
Topline Securities’ analyst Umair Naseer said that the aggressive inflow of workers’ remittances played a leading role in lifting the deposits over the past one year.
On the other hand, the government’s reliance on commercial borrowing to finance budget deficit encouraged banks to increase investment in debt securities, he said.
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