By the end of September 2024, bank deposits in Pakistan surged to a historic Rs 31.342 trillion, reflecting a remarkable year-on-year increase of 19.1%, according to data released by the State Bank of Pakistan (SBP). This milestone marks a significant step in the nation’s banking landscape, showcasing robust growth despite the challenges posed by fluctuating interest rates.
Previously, the bank deposits were reached to the record high at Rs 31.12 trillion by end of June 2024.
The latest figures also reveal a modest monthly increase of 1.82%, rising from Rs 30.78 trillion in August. This growth can be attributed to elevated interest rates, which have rendered bank deposits an attractive option for savers seeking lucrative returns. However, the recent reduction in interest rates has contributed to a slowdown in monthly deposit inflows. The SBP cut the policy rate by a total of 350 basis points in July and September 2024, culminating in a cumulative reduction of 450 basis points since June 2024, driven by a sustained decline in inflation.
In its Annual Report for the fiscal year 2023–2024, the SBP noted a decrease in the currency-in-circulation to deposit ratio, a trend attributed to the influx of bank deposits. The report highlighted that the government has increasingly relied on domestic banks to finance its budget deficit amidst a shortfall in external funding. Consequently, banks have channeled these deposits into government securities, reflecting a low demand for private sector credit during FY24.
As of September 2024, the advances made by the banking sector reached Rs 12.305 trillion, representing a 3.8% increase compared to the previous year. Month-on-month, advances rose by 4.2%. Concurrently, banks’ investments surged to Rs 30.699 trillion, showcasing a staggering 35.7% year-on-year growth, although there was a slight month-on-month decline of 1.1%.
Private-sector credit demand began to show signs of recovery during the last fiscal year, concluding on June 30, 2024, after experiencing low growth throughout FY23. The increase in credit to the private sector was fueled by a gradual uptick in economic activity and ongoing cost pressures in various industries, necessitating working capital loans for businesses. Notably, private-sector credit expanded by 4.0% in FY24, compared to 2.3% in FY23.
Despite this rebound, commercial banks have shown a strong preference for risk-free investments in government securities, spurred by the government’s heightened borrowing demand amid rising interest rates. The advance-to-deposit ratio (ADR) fell to 39.3% in September, down from 45.1% a year earlier.
With the government’s borrowing needs decreasing due to a surplus of funds from improved dividend income and foreign financial inflows, banks now grapple with excessive liquidity. As a result, banks that fail to achieve the 50% ADR threshold by December 2024 will incur additional taxes, emphasizing the need for effective liquidity management. The investment-to-deposit ratio stood at an impressive 97.9% in September, up from 86% the previous year, highlighting the ongoing transformation within Pakistan’s banking sector.