Bank deposits surge to all-time high

Government, private sector and household deposits with banks in Pakistan grew 22% - the fastest pace in 14 years - to touch an all-time high of Rs19.8 trillion in fiscal year ended June 30, 2021 in the wake of a turnaround in the national economy.

Bank deposits had stood at Rs16.2 trillion a year ago on June 30, 2020, according to Topline Research.

"Acceleration in economic activities directly supports deposit growth as businesses and people earn more," Arif Habib Limited Head of Research Tahir Abbas said.

Pakistan's economy grew 4% in FY21 compared to the negative growth of 0.5% in the prior fiscal year. The government has set the growth target at 4.8% for the current fiscal year, which started on July 1.

"Growth in deposits came due to higher worker remittances (which soared 27% to a record high of $29.4 billion, equivalent to around Rs4.6 trillion, in FY21)," Topline Research said in a commentary.

Overseas Pakistanis send remittances to their family members back home mainly through banking channels which are reflected in deposits. In case the recipients spend the remittances, they still remain part of the national economy.

Besides, the government's exorbitant borrowing from commercial banks - to bridge its budget deficit, shift to digital banking from conventional banking and excessive money printing all supported the increase in deposits over the year.

"A pickup in migration of financial transactions to digital channels over the last one year of the pandemic also helped keep a significant amount of deposits in the banking system, meaning transactions took place but the money did not go out of the banking system technically," Meezan Bank Head of Product Development and Shariah Compliance Senior Executive Vice President Ahmed Ali Siddiqui said the other day.

"Government's high borrowing from commercial banks has apparently created money (due to the multiplier effect) in the banking system," another banker said. He recalled that the International Monetary Fund (IMF) had barred the government from borrowing from the central bank for budgetary purposes with effect from July 1, 2019.

"The government is borrowing trillions of rupees from banks and the borrowed money still stays in the banking system. The double entry (deposit and lending) may have artificially created money in the system," he said.

"Going forward, we expect average deposit growth of 15% from 2021-23 compared to last 10-year average growth of 13%," Topline Research said.

Bank investments (risk-free lending to the government) in the sovereign debt securities like Pakistan Investment Bonds (PIBs) and TBills soared 29% to Rs13.7 trillion in FY21.

"Excess liquidity is being invested by banks due to muted growth in advances (bank credit to private sector)," the report said. The investment-to-deposit ratio (IDR) increased from 66% in June 2020 to 69% in June 2021, but it was down from 70% in March 2021.

On the other hand, advances grew 10% to

Rs9 trillion in FY21 as banks remained wary of overall economic conditions due to Covid19. "However, growth of 5% in the last quarter (April-June FY21) compared to the previous quarter (January-March) in bank lending is an indication of improving outlook," it said.

Advances-to-deposit ratio (ADR) declined from 51% in June 2020 and 48% in March 2021 to 45% in June 2021.

"We expect ADR to improve as the government has imposed a tax on banks which fail to meet the minimum threshold of 50% ADR and as economic activity picks up."

Total provisions against advances stood at Rs629 billion and remained unchanged over the past one year despite overall concerns of a sharp spike in non-performing loans (NPLs) due to the pandemic-linked deterioration in the financial health of corporates.