Pakistan banks: driving engine of country's economy.

Byline: Shabbir Kazmi

According to the latest data released by State Bank of Pakistan (SBP), overall deposits of Pakistan banks have grown by 17% to Rs17.1 trillion in 2020. The growth is the highest in 4 years and is better than 10-year average of 13%.

Growth in Deposits has been fueled by higher Remittances (+17.5%YoY in USD terms and 27.5%YoY in PKR terms during 11MCY20). It is also fears that the lack of business activity due to COVID-19 may have resulted in increase in bank deposits.

Investments have grown by 31% to Rs11.5 trillion in 2020. At the start of the year high yield on offer had already lured banks to move towards investments, which was compounded further as COVID-19 hit strangling business activity and in turn loan growth.

Advances grew by just 2% in 2020 as banks remained wary of overall economic conditions due to COVID-19. However, last quarter of 2020 for Advances has been relatively better with 3.4%QoQ growth. The aggressive cuts in interest rates by the central bank since March 2020 may be starting to reap fruits as the impact of COVID-19 pandemic also lowers and economic activity picks up.

Investment to Deposit Ratio (IDR) had already depicted an improvement to 67% in September 2020, which has been maintained at year end. To recall this was 66% in June 2020 and 60% in December 2019. The higher IDR is largely due to high interest rates at the start of the year and low appetite for risk (Advances) due to COVID-19. ADR has dropped to 48% from 49% in September 2020 (to recall, this was at 51% in June 2020 and 56% in December 2019).

M2 growth clocked in at 16% in 2020 primarily driven by the stellar deposit growth this year and a 19% increase in Currency in Circulation (CIC). CIC increased to Rs6.30 trillion by end December 2020, with CIC as a percentage of M2 clocking in at 29%, above past 5-year average of 27%. Reasons for increasing CIC can be attributed to low interest rates and evasion from tax authorities.

Going forward, analysts expect Deposit growth in the range of 12-14% during 2021, while Advances are estimated to grow by around 4-6%, where banks are expected to remain risk averse given concerns over further waves of COVID-19.

SBP TERF Scheme

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