Deposits in banks fell 2.4% (or 485.5 billion rupees) in one month to 19.4 trillion rupees at the end of October 2021, after financial institutions apparently adopted a strategy to reduce deposits to avoid paying extra tax.
“Financial institutions are, however, on the verge of revisiting the deposit reduction strategy and launching a ‘deposit war’ following a one percentage point increase in the required cash reserve (CRR) to 6. % “, said Arif Habib Limited. (AHL) economist Sana Tawfik.
The CRR is the amount parked by commercial banks with the central bank at zero return. “In the meantime, the central bank has made it compulsory for banks to pay a minimum profit of 7.25% on deposits in savings accounts,” Tawfik said in a conversation with The Express Tribune.
Total bank deposits stood at 19.8 trillion rupees at the end of September 2021, according to data from the State Bank of Pakistan (SBP).
Previously, the government had told banks that they would have to pay an additional tax if they failed to increase their advance (private sector credit) to deposit (ADR) ratio to more than 50% as of July 1, 2021.
“They chose to reduce their deposits instead of increasing the advances to meet the government’s requirement of the advance to deposit ratio,” she said.
“Banks had started offering an unattractive rate of return on savings accounts to discourage account holders from depositing funds, as they did not find it possible to increase credit flows to the private sector given the outlook. economic activities in the country, ”she said.
Banks are now subject to an additional 5% tax if their ADR remains below 40% and must pay an additional 2.5% tax if the ADR remains between 40% and 50%.
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“There are only a few banks that meet the mandatory ADR condition,” she said.
“A majority of them prefer to invest their deposits in government risk-free debt securities such as Treasury bills and Pakistani investment bonds (GDPs) instead of taking the risk of increasing advances to the private sector. “
The bank deposit reduction strategy worked as the ADR ratio rose 1.71 percentage points to 49% in October.
However, the ratio fell by 14 basis points compared to the same month last year.
The strategy prompted account holders to keep their cash on hand and spend more, which was one of the reasons for the acceleration in the reading of inflation.
As a result, the central bank increased the CRR and increased the minimum rate of return on savings accounts to 7.25% to encourage account holders to deposit more money in banks and reduce the flow of money. in the economy, Tawfik said.
The central bank raised the minimum savings rate after raising the benchmark interest rate by 1.5 percentage points to 8.75% on Friday last week (November 19).
Banks have not reduced their deposits in just a month as deposits have been slowing for a few months.
In addition, the impact of an increase in CRR has not yet been observed, as the CRR has been increased during the current month.
The increase in CRR, the increase in the return on savings and additional taxes are expected to trigger a deposit war between banks. Pakistani workers’ remittances from overseas have been one of the main reasons for the notable growth in bank deposits over a period of time.
“Remittances slowed 5.7% (or $ 152 million) to $ 2.5 billion in October from the previous month,” she said. “The slowdown also contributed to the weak growth in deposits. “
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Annual figures Over the past year, deposits in banks have increased significantly by 16% to reach 19.4 trillion rupees, largely as a result of aggressive growth in workers’ remittances, a- she declared.
Bank investments in government debt securities such as treasury bills and GDPs also slowed 2.1% to 13.8 trillion rupees in October, from 14.1 trillion rupees in September.
Investing in securities remains a means of lending to the government for budgetary borrowing.
Investment increased significantly by 26% to reach 13.8 trillion rupees in October 2021, compared to 10.9 trillion rupees in October 2020.
Thus, the investment-to-deposit ratio (IDR) rose to 71% in October, up 5.66 percentage points year-on-year and 23 basis points over one month.
Topline Securities analyst Umair Naseer said the aggressive influx of worker remittances has played a leading role in raising deposits over the past year.
On the other hand, the government’s dependence on commercial borrowing to finance the budget deficit has encouraged banks to increase their investments in debt securities, he said.