Banks investment rises despite slow deposit growth

Advances as well as investment by the banking sector grew on a year-on-year basis during the first half of 2016 despite fall in deposits growth. This suggests that they are investing more than they have in their coffers, using borrowed money from the State Bank of Pakistan (SBP).

The SBP injected Rs1.79 trillion July 11 for four days and Rs1.133tr on July 15, reflecting a liquidity gap of over Rs1.1tr in the banking system. For last two years, banks have been relying heavily on liquidity injecting by the SBP; the injections amount to over 1.2tr most of the time.

The trend is an outcome of the government's policy as it remained dependent on borrowing from commercial banks to meet the budgetary deficit for the last two fiscal years. The State Bank in its recent report said the banks' deposits growth fell by almost 50 per cent in the first nine months (July to March) of the previous fiscal year.

In its third-quarterly report, the SBP said private sector deposits increased by Rs149.4 billion during July-March FY16 - less than half of the rise recorded during the corresponding period of FY15.

However, "banking sector's advances grew at an eight-year high rate of 7pc in first half of 2016, led by multi-year low interest rates and improving macros," said a Topline Securities research report.

The advance-to-deposit ratio (ADR) increased by 51pc in June compared to 50pc in the same month a year ago. Similarly investment-to-deposit ratio (IDR) increased to 75pc compared to 64pc in June 2015.

"The sum of IDR and ADR touched 126pc in June 2016 as against 114pc in June 2015. This expansion was due to banks' continued borrowing from the SBP," the research report said.

Another report of the State Bank showed that the government borrowed Rs1.381tr from July 1, 2015 to June 24, 2016.

Since the banks are facing low deposits growth and depending on the State Bank to meet the liquidity requirement, the government may opt to borrow again from the central bank during this fiscal year after the end of the International Monetary Fund agreement which restricts it not to borrow from the SBP.