Banking deposits grow 18pc despite low interest rates

KARACHI: Banking deposits rose 18 percent year-on-year to Rs16 trillion in August despite low interest rates as the central bank’s financial inclusion policies and financial support to lockdown-hit individuals and businesses kept the inflows into the system intact, bankers said on Saturday.

The State Bank of Pakistan’s (SBP) data showed that banking deposits amounted to Rs13.6 trillion in the same month a year earlier. Banking sector deposits grew 1.5 percent month-on-month from Rs15.8 trillion in the previous month. Resident deposits rose 17.7 percent to Rs15.7 trillion, while non-resident increased 26.7 percent to Rs334.3 billion.

Bankers said there are some reasons behind the deposit growth amid the low interest rate regime. Banks are servicing customers in these protection schemes. So, all that money flowed into bank accounts, they said.

“This is because of, in one way or another, by the response to the coronavirus pandemic,” a banker said. The government unleashed funds to bolster small businesses and individuals via the coronavirus relief package and at the same time the SBP announced concessional refinancing facilities to support employment.”

The SBP slashed interest rates by 625 basis points to 7 percent from March to June in response to the coronavirus lockdown for five months. The minimum deposit rate was reduced to 5.5 percent in the first quarter of 2020 from 9.50 percent in the previous quarter.

Low interest rates happen deter depositors, denting deposit growth in the formal banking sector. In a low interest rate environment, money is taken out of deposits and shifted to other instruments with higher returns. Savers look for safe avenues to park money. Moreover, risk-averse individuals are putting money in bank deposits given the high uncertainty due to COVID-19 outbreak, according to the bankers.

“Increase in banking system deposits is as per past trend and this is mainly due to budgetary allocations. Yes some increase in deposit may be attributed to financial aid/response of the government against COVID-19 and also because of financial inclusion strategy,” said the banker.

Soofi Saifullah Akber, a head of treasury at JS Bank said as far as currency in circulation is concerned, the same has had an increasing trend ever since the tax on cash withdrawals was introduced and the same caused an increase in the size of the parallel economy. Moreover, the recent increase has also been caused due to the Prime Ministers cash relief program for individuals facing liquidity problems during lockdowns. “For deposits growth, it is normal to have some growth every year, however, the system has witnessed some liquidity injections post announcement of a relief package of Rs1.2 trillion to support the economy, which is eventually parked within the banking system,” said Akber. “The recent increase in money supply is not done with an aim to enhance consumption; it has rather been done to provide enough buffers to avoid any liquidity crunch during the pandemic time.”

Government deposits stood at Rs2.4 trillion in August compared with Rs2 trillion in the same month last year. Personal deposits increased 18.5 percent to Rs8.1 trillion, said the SBP.

Deposit growth continued its upward trend driven by higher net domestic assets (NDA) of the banking system. The increased government borrowing from banks led to the rise in the growth of the NDA. In August, the stock of NDA stood at Rs20.934 trillion, up 11 percent from a year ago.

The stock of government’s borrowing for budgetary support increased 17 percent to Rs13.6 trillion in August. Growth in money supply or M2 reflects in deposits. M2 clocked in at Rs21.4 trillion at end-August, up 17.2 percent a year earlier. The cash penetration in the economy remained strong as currency in circulation rose 17.3 percent to Rs6.2 trillion.