Bank deposits up 9pc to Rs12.7trln till Nov-end

KARACHI: Banking deposits rose around nine percent year-on-year to Rs12.741 trillion till November-end as back-to-back rate hikes made the parking of funds into banks attractive, although deposit growth is still not decent enough due to withholding tax on financial transactions, analysts said on Monday.

The State Bank of Pakistan’s (SBP) latest data showed that banking deposits stood at Rs11.691 trillion in the corresponding month a year. Analysts said higher interest rates created an incentive for depositors to place their funds with banks, leading to spike in inflows. The central bank has pushed up the policy rates by cumulative 425 basis points to 10 percent since January. The current interest rate is four-year high. Profit rates on savings accounts are hovering around 8.5 percent.

The rise in deposits was largely driven by the resident deposits, which increased 8.4 percent year-on-year to Rs12.535 trillion, while non-resident deposits increased to Rs206 billion from Rs128 billion a year earlier. Government deposits stood at Rs1.849 trillion in November compared with Rs1.639 trillion. Personal deposits rose to Rs6.240 trillion from Rs5.705 trillion, according to the data breakups.

Analysts said banking deposits are increasing at a snail’s pace, reflecting in tepid growth in money supply (M2). “One of the major reasons for slower growth in money supply has been decline in net foreign assets, reflected through net decline in foreign exchange reserves,” Muhammad Asim, chief investment officer at MCB-Arif Habib Savings and Investments Limited said. “During FY2018, foreign exchange reserves declined by near $5 billion. On the domestic deposit growth, incidence of increased monitoring of banking transactions and taxation on non-filers has also been significant dampeners.” Asim further said money outside bank deposits as measured by currency in circulation is now about 27 percent of money supply, “whereas it was on an average near 22 percent just three years ago”.

“An overall lower inflation level as measured by CPI (consumer price index) for the last two years (FY17 and FY18) has remained near four percent which is also one of the factors behind lower M2 and deposit growth,” he added. Asim said shift to mutual funds didn’t impact banking industry as mutual funds are part of the financial system and the industry invests in domestic assets.

“In fact, since mutual funds actually encourage investors to save and invest rather than keeping money in pockets, their growth in turn contributes to banking deposit growth,” he added. “Mutual funds serve as conduit where investors route their money to bank deposits through mutual funds which in turn have the potential to provide them better return than a savings account because they pool in money and have better ability to negotiate better return for investors than an average saver.”

The SBP said deposit-to-M2 ratio has continued to slide during FY17 and FY18 as the impact of withholding tax was hindering the movement of cash back into the banking system. “Measures should be taken to encourage savers to place their funds with banks,” the SBP said in a report.