Banking deposits grow to historic high as SBP makes return attractive

Banking deposits grow to historic high as SBP makes return attractive

KARACHI: Banking deposits have grown to historic high level of Rs 22.92 trillion by February 2023, according to data released by State Bank of Pakistan (SBP) a day earlier.

Analysts believed that the investors found banks as safe haven and significant return after the SBP raised benchmark policy rate to 20 per cent.

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The deposits of the banking system registered phenomenal growth of over 15 per cent to Rs22.92 trillion by end of February 2023 when compared with Rs19.91 trillion by end of February 2022.

Previously, the highest level of deposits of the banking system was seen in September 2022.

The central bank on March 02, 2023 increased the key policy by 300 basis points to 20 per cent in order to fulfil another condition of the International Monetary Fund (IMF).

During the last meeting in January, the Committee had highlighted near-term risks to the inflation outlook from external and fiscal adjustments.

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“Most of these risks have materialized and are partially reflected in the inflation outturns for February. The national CPI inflation has surged to 31.5 percent y/y, while core inflation rose to 17.1 percent in urban and 21.5 percent in rural basket in February 2023,” according to the SBP.

Banking analysts said that the attractive rate of returns resulted in a massive increase in banking deposits. They said high interest rates and uncertain economic conditions made the banking system a safe haven for investment.

The central bank raised 13 per cent or 1,300 basis points during the past 16 months. The policy rate was raised by 25 basis points in September 2021 and since then the central bank adopted aggressive monetary tightening.

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Making the deposits more attractive, the SBP on March 02, 2023 made the latest hike in the benchmark interest rate by 300 basis points to 20 per cent from 17 per cent.

Analysts at Arif Habib Limited said that the policy rate hike would impact mostly the government, as it has been the largest borrower from commercial banks and the rate rise will jack up interest payments to banks.

The higher borrowing by the government from commercial banks left little room for private sector credit offtake. The private sector borrowing from the commercial banks fell by 46 per cent to Rs421 billion during July 01, 2022 to January 06, 2023 as compared with Rs773 billion in the same period of the last fiscal year.

The rising interest rate added to the cost of doing business for the industries, which are already facing short of raw material due to non-opening of Letter of Credits (LCs) and high energy prices.

As the deposit base is rising the banks are making an aggressive investment in government treasuries. The government borrowing for budget financing through raising treasury bills increased sharply to Rs1.54 trillion during first eight months of the current fiscal year as compared with Rs627 billion in the corresponding period of the last fiscal year.