Banks record strong deposits, lend most of it to government

Private sector faces limited credit availability as government borrowing surges

KARACHI:

Pakistan’s commercial banks witnessed remarkable growth in deposits during the previous fiscal year 2023. However, almost 80% of these funds were lent to the cash-strapped government at record-high interest rates after taxes against low credit to the private sector were removed.

Deposits soared by an astounding 12% to reach a record high of Rs25.50 trillion in FY23. This increase was fuelled by higher returns on savings accounts and fixed deposits, following the central bank’s benchmark policy rate reaching an all-time high of 22%.

The surge in deposits provided banks with ample room to lend a substantial amount of funds to the government, as regulations for credit to the private sector were relaxed. Consequently, banks’ investment in government debt securities such as T-bills and Pakistan Investment Bonds (PIBs) spiked by 20% to reach Rs20.89 trillion in FY23, compared to Rs17.42 trillion in FY22.

This influx of funds into government debt led to a rise in banks’ investment-to-deposit ratio (IDR) by 5.6 percentage points, reaching a record high of 82% for the year.

In contrast, credit extended by banks to the private sector increased by 12% to Rs12.20 trillion in FY23, compared to Rs10.88 trillion in FY22. However, the advance-to-deposit ratio (ADR) remained stagnant, slightly below 48% for the year.

The stagnation in ADR can be attributed to the withdrawal of a tax on banks that would have been imposed if their ADR remained below 50% six months ago.

Speaking to The Express Tribune, Arif Habib Limited, Economist, Sana Tawfik explained that the removal of the tax eased banks’ ability to lend maximum funds to the government for budgetary support. This change also relieved banks from making extra efforts to extend funding to the private sector, which remains the engine of economic growth.

Tawfik noted that credit to the private sector remained stagnant due to the central bank’s efforts to keep demand for credit from businesses subdued. This was done to control inflation, which reached a six-decade high of 38% in May 2023.

The State Bank of Pakistan (SBP) raised its benchmark policy rate by 8.25 percentage points in FY23, reaching an all-time high of 22%. This made borrowing costs so expensive that businesses could not afford bank financing.

Due to limited options, banks provided the majority of their funding to the cash-strapped government. They charged historical rates of return of 22-23% on government financing.

Tawfik attributed the surge in deposits to inflows of workers’ remittances, which reached $27 billion in the year. These inflows largely found their way into deposits as part of the money in circulation within the country.

Furthermore, the record-high interest rates played a significant role in driving deposit growth. Banks offered comparatively higher returns on savings accounts and attracted fixed deposits by providing attractive returns.

Tawfik added that the 28% devaluation of the rupee to Rs286/$ in FY23 was another factor contributing to the growth in deposits, as individuals received higher amounts in rupees when converting US dollars.

Overall, the strong deposit growth in the banking sector has led to increased liquidity and provided the government with necessary funds. However, it has also constrained the availability of credit for the private sector, hampering its ability to drive economic growth.

Published in The Express Tribune, July 14^th, 2023.

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