Commercial banks in Pakistan have failed to attract new deposits from account holders, but have kept on increase secure lending at exorbitant returns to the cash-strapped government compared to lower credit offers to private segment for economic activities.
Deposits improved by 0.2 percent to Rs 22.15 trillion in August 2022 from Rs 22.10 trillion in the previous month. However, deposits were significantly lower than the record Rs 22.81 trillion recorded in June 2022, according to data from the central bank and brokerage houses.
However, banks increased risk-free lending (through investment in sovereign debt securities) to the government by 3.3 percent to a new peak of Rs 18.18 trillion in August from Rs 17.60 trillion in July.
As a result, banks’ investment-deposit ratio (IDR) rose to an all-time high of 82.1 percent in August from 79.7 percent in the previous month.
Speaking to The Express Tribune, Sana Tawfiq, economist at Arif Habib Ltd, said that banks have increased their lending to the government by borrowing from the central bank (as deposits growth is slow).
He explained that the central bank continued to inject money into commercial banks through open market operations (OMOs). Commercial banks obtain financing from the central bank at a relatively low rate of interest and lend it to the government at a higher rate. This process has helped banks raise their IDRs.
He said that amid the economic slowdown in the country, banks have failed to increase the deposits of account holders. Government measures to cool the overheated economy at the start of the current financial year in July 2022 and the subsequent appearance of catastrophic floods have affected economic activity.
Second, a drop in worker remittance inflows to $2.5 billion in July compared to over $2.7 billion in previous months also limited deposit growth.
“Historical evidence suggests that increases in workers’ remittances have been a major cause of increases in bank deposits,” he said.
Bank lending to the private sector rose to Rs 10.92 trillion in August 2022 from Rs 10.86 trillion in the previous month, data from the central bank and brokerage houses showed.
Credit growth to the private sector remained disappointing as the central bank raised its key policy rate by 800 basis points to 15 percent from September 2021 to July 2022, after a significant rise in lending costs.
Slower growth in credit to the private sector pushed the advance-to-deposit ratio (ADR) to 49.3 percent in August compared to 49.1 percent in July.
One can easily see poor banking practices by taking a look at the IDR which stood at 82.1 percent as against ADR’s 49.3 percent in August.
Banks have continued safe banking by extending credit to the government, measured by the IDR, against cheap loans to the private sector (ADR), the core of banks worldwide. Work is to support economic activity.
Tawfiq said credit to the private sector has come down somewhat after the central bank introduced concessional loan schemes for industrialization for a limited period during the Covid-19 pandemic.
In addition, the previous federal government imposed additional taxes on banks that failed to lend to the private sector.
He recalled that the government imposed an additional tax of 5 percent on banks with an ADR of less than 40 percent, 2.5 percent on banks with an ADR of more than 40 percent but less than 50 percent, while banks with an ADR of 50 percent But there was no additional tax. or above.
