Bank deposits jump 21pc y/y on remittances, rate incentives

KARACHI: Pakistanis are saving more money in banks as remittances from overseas workers soar and interest rates remain at a record high.

Deposits at banks increased to Rs27.5 trillion in January, up 21 percent from a year earlier, according to the State Bank of Pakistan data on Monday. Bank deposits, however, fell by 1.1 percent month-on-month in January. The deposits stood at Rs27.841 trillion in the previous month.

The growth in deposits was driven by a combination of factors, including the higher rate of return offered by banks in the wake of a tight monetary policy, the expansion of banks' branch networks, and the improvement in remittance inflows from the Pakistani diaspora, brokerage Optimus Capital Management said.

The central bank has increased its benchmark interest rate by a total of 15 percentage points to a record 22 percent since September 2021 amid skyrocketing inflation. The policy rate has stayed at 22 percent since June 2023. The rate is the highest among major emerging markets.

The currency-to-deposit ratio has been on a declining trajectory due to the strong growth in bank deposits and a decline in currency in circulation. Remittances from expatriate workers rose by 26.2 percent year-on-year to $2.4 billion in January.

The data showed that banks' investments rose from Rs19.293 trillion in January of last year to Rs25.603 trillion in January 2024, a 32.7 percent increase. These investments saw a month-on-month increase of 1.3 percent as well.

However, banks’ advances grew only by 3.7 percent to Rs12.095 trillion. The advances saw a monthly decline of 2.1 percent. As businesses and consumers were hesitant to take out new loans, bank credit to the private sector declined.

High public-sector borrowing restricts the amount of bank funding that the private sector can access. Pakistani banks are unable to utilise their massive liquidity since they have the opportunity to invest in risk-free government securities. Banks blame a drop in lending on borrowers' poor appetite driven by faltering economic activity and higher interest rates.

Banks’ investment-to-deposit ratio surged to 93 percent in January from 85 percent in the same month last year, while the advance-to-deposit ratio fell to 44 percent from 51 percent a year earlier.

The International Monetary Fund said in its country report, which was released last month, that banks' sovereign exposure increased from 48 percent of assets at the end of FY21 to 55.3 percent at the end of September 2023, with private sector credit decreasing.