Pakistan's bank deposits surge 19% in September

Pakistan's banking sector has seen a significant increase in deposits, which grew by 19% by the end of September compared to the same month last year.

This growth is attributed to higher interest rates offered by financial institutions to account holders.

According to data released by the State Bank of Pakistan (SBP), bank deposits reached PKR 31,342 billion ($111.9 billion) in September this year, up from PKR 26,318 billion in September 2023.

Investments by banks also saw a substantial rise, increasing by 36% to PKR 30,699 billion, while advances grew by 3.8% to PKR 12,305 billion over the same period.

The Advance to Deposit Ratio (ADR), a key indicator of banking sector health, was 39.3% in September, down from 45.1% last year. In August, the ADR was around 38.4%.

Analysts note that banks have introduced several plans to boost advances, including offering cheaper loans for the auto sector and other initiatives to increase cash flow.

These measures aim to meet the ADR requirement by December and avoid additional taxes. If banks' ADR falls below 40%, they face an additional tax of 16%, while an ADR below 50% incurs a 10% tax.

The SBP's Annual Report for 2023-24 highlighted that the accumulation of domestic debt was primarily sourced from scheduled banks during fiscal year 2023-24 (FY24). Funds mobilized from banks more than doubled to PKR 8.6 trillion in FY24 from PKR 4.0 trillion in FY23. This shift is due to the suspension of higher taxes on banks' investments in government securities for FY24, linked to the ADR.

Higher returns on bank deposits have attracted individuals to place their funds in banks rather than in lower-yielding alternatives like National Savings Schemes instruments. The currency-in-circulation remained almost unchanged, with a slight increase of PKR 4.4 billion in FY24 compared to a significant expansion of PKR 1.6 trillion the previous year.

The SBP's digitalization efforts and attractive deposit rates have driven these trends in currency in circulation. Additionally, decreased uncertainty and relatively lower inflation have also contributed to the slowdown. Anecdotal evidence suggests that crackdowns on smuggling and hoarding of foreign currencies may also have discouraged an increase in currency in circulation.

Overall, the growth in bank deposits accelerated to 22.5% in FY24 from 11.7% in FY23, led by saving deposits in line with the tight monetary policy stance.