Karachi, December 3, 2024 – Banks in Pakistan witnessed significant withdrawals in October 2024, as deposits fell by Rs 226.42 billion, according to data released by the State Bank of Pakistan (SBP).
At the end of October 2024, total bank deposits stood at Rs 31.12 trillion, down from Rs 31.34 trillion in September 2024, reflecting a slight decline of 0.7% month-on-month (MoM). Despite this drop, the banking sector’s deposits showed a robust year-on-year (YoY) growth of 17.9%, indicating a strong upward trend compared to the same period last year.
The October 2024 data also highlighted a rise in bank advances, which amounted to Rs 13.8 trillion. This represents a 15.8% increase YoY and a 12% increase MoM, signaling that banks are actively lending to the private sector as economic conditions gradually improve. In particular, the lowering of interest rates has encouraged businesses to take out loans, further boosting the demand for credit.
Notably, investments by banks fell by 5.7% on a MoM basis but surged by 24.6% YoY, reaching Rs 28.9 trillion by the end of October. This increase in investments comes as banks work to maintain their advance-to-deposit ratio (ADR), which is a critical measure for the banking sector’s performance. In order to avoid additional taxes, banks are making a concerted effort to meet the 50% ADR benchmark set by the SBP.
As part of its monetary policy easing, the SBP reduced its key interest rate by 250 basis points (bps) to 15% at its fourth consecutive meeting in October. Since June, the SBP has cut interest rates by a total of 700 bps. This reduction has made borrowing more attractive, contributing to the surge in bank advances. If banks fail to maintain an ADR of at least 50% by December 31, they will face an additional tax on profits from government securities, with rates of 10% and 16% for ADRs below 50% and 40%, respectively.
In October, the ADR for the banking sector rose to 44.3%, up from 39.3% in September, as banks accelerated efforts to increase private sector loans and reduce deposits. Meanwhile, the investment-to-deposit ratio (IDR) increased to 93% from 88% in the same month last year.
Additionally, the SBP’s recent decision to remove the minimum deposit rate (MDR) requirements for corporate and government deposits, while applying them to retail deposits for Islamic banks, has altered the playing field. This move has benefited conventional banks, as Islamic banks now face additional challenges due to the new MDR regulations.
The demand for government securities, particularly the 12-month Market Treasury Bills (T-bills), remains strong, driven by banks striving to balance their ADRs. Analysts noted that T-bills were trading at a discount of 11.7%, well below the current policy rate of 15%, which further underscores the excess liquidity in the market as banks work to stay ADR-compliant.
Overall, the banking sector’s performance in October reflects a mix of challenges and opportunities, with withdrawals and deposit declines offset by an increase in lending and investments. The sector is poised to navigate these challenges as it continues to adjust to evolving economic conditions and regulatory changes.
