Private businesses: Banking deposits down 5.25%

Clock up at Rs2.3t at the end of July; withholding tax partial reason

KARACHI:

Amidst protests over the new tax on banking transactions, deposits of private businesses declined 5.25% on a month-on-month basis in July, latest data released by the State Bank of Pakistan (SBP) on Wednesday shows.

Deposits belonging to private businesses clocked up at Rs2.3 trillion at the end of July. This means deposits of Rs131.8 billion left the banking system in the first month of 2015-16 alone.

Many analysts had anticipated a steep decline in deposits at the beginning of the fiscal year when the withholding tax on banking transactions by non-filers worth more than Rs50,000 in a single day became effective.

“The withholding tax is one of the many reasons for the sharp decline in deposits of private businesses in July,” said BMA Capital Management Research Analyst Iqbal Dinani while speaking to The Express Tribune.

However, he noted that deposits always post a month-on-month decline in July when the effects of ‘window-dressing’ that commercial banks carry out at the end of June (and December) wear off.

Commercial banks rejuvenate their efforts to generate deposits to spruce up their balance sheets every six months. But deposits go down subsequently, as the money is withdrawn in the next month or so.

Statistics from 2014 support this assertion: the month-on-month decline in the deposits of private businesses clocked up at 5.24% in July last year, which is almost equal to the decrease registered in July 2015. Although deposits belonging to private businesses have increased at a compound annual growth rate of 13.6% since 2010, they have consistently recorded a month-on-month decline every July during the last five years.

Banking in Pakistan revolves around mobilising low-cost deposits in the shape of current and saving accounts that now represent about 70% of total deposits as opposed to 65% in 2010. Banks then invest this money heavily in government papers while restraining private-sector credit growth.

Average advances to average deposits ratio of the banking industry was only 50.2% in 2014, down from 52% in the preceding year because the rise in deposits was higher than the corresponding increase in advances.

Unlike many analysts The Express Tribune spoke to, commercial bankers tend to believe the decline in deposits of private businesses in July is far from a “short-lived” phenomenon.

In background conversations, business relationship managers working for different commercial banks have said the imposition of the 0.3% withholding tax has deeply hurt deposit mobilisation at the retail level. Informal payment mechanisms, like the Parchi system, have sprung up across the country to facilitate business activities while avoiding the banking channels altogether, they claim.

Similarly, the use of prize bonds and dollars in lieu of formal payment instruments like cheques to carry out business deals has also surged in recent days, they say.

“Such parallel arrangements can last for as long as there are no defaults on payments. People will have no choice but to return to the proper way of doing business sooner or later. Any reduced use of banking channels will be short-lived,” said a former central banker.

Published in The Express Tribune, August 20^th,  2015.

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