KARACHI, Nov 1: Banks in Pakistan saw a combined increase of Rs109 billion in their total deposits in April-June this year, despite the fact that the weighted average rate of return on the deposits did not rise during this period — it rather declined.

Total deposits of the banking system rose from Rs1,736 billion at end-March to Rs1,845 billion at end-June, showing a growth of Rs109 billion or 6.3 per cent in three months.

But the weighted average rate of return on bank deposits fell from 2.81 per cent at end-March to 1.90 per cent at end-June, showing a decline of 91 basis points. Both at 2.81 per cent as well as at 1.90 per cent, this rate of return was clearly negative as year-on-year inflation at end-March and at end-June was higher — 3.39 per cent and 3.10 per cent to be exact. How then the banks were able to raise additional deposits?

Bankers say what helped them raise additional deposits was that there was enough money available in the country — thanks to rising workers’ remittances or money sent back home by expatriate Pakistanis. The State Bank also supports this view.

“As was the case in the previous quarters, continuous inflows of funds from abroad appear to be fuelling the deposits’ growth,” says a State Bank report on quarterly performance of the banking system, prepared by its Banking Supervision Department.

During April-June 2003, Pakistan received through the banking channel $1 billion as workers’ remittances that translates into Rs60 billion. In the fiscal year 2002-03, workers’ remittances were in excess of $4 billion or Rs240 billion. The deposit growth of Rs109 billion in April-June on the back of rising remittances does not mean that the entire amount of remittances stayed with banks as additional deposits. It simply means that these remittances enhanced money supply levels, enabling the banks to raise more deposits.

The State Bank report on the performance of the banking system in April-June 2003 says that domestic deposits accounted for 98 per cent of the total increase in the bank deposits.

Figures for domestic deposit base of the banking system confirms this statement. At end-March, total domestic deposits stood at Rs1,577 billion. The figure rose to Rs1,688 billion at the end of the last week of June, on 29th, for which the figures are available, showing a rise of Rs111 billion.

The figures for domestic deposits as of June 30, 2003 are not available but they must have fallen slightly, bringing this Rs111 billion increase in three months to around Rs107 billion or 98 per cent of the additional deposits of Rs109 billion that the banks raised in April-June this year. An SBP official explained to Dawn that the difference between the total deposits of the banking system that stood at Rs1,845 billion at end-June and the total domestic deposits of Rs1,688 billion represented the deposits of the banks mobilized outside the country.

It says that local private banks mobilized 67.5 per cent of the additional deposits, not only because they handed out higher rates of return than the state-run and the foreign banks, but also because they expanded their branch networks and offered better quality services.

According to the SBP classification, there are 17 local private banks in Pakistan, including three of the five major local banks — Allied Bank, Muslim Commercial Bank and United Bank. The remaining two, National Bank and Habib Bank, are classified as public sector commercial banks together with First Women Bank, the Bank of Khyber and the Bank of Punjab.

The five largest banks (National Bank, Habib Bank, United Bank, Muslim Commercial Bank and Allied Bank) got around 60 per cent of the growth in total deposits against their share of 66 per cent in the total deposits of the banking system.

Category-wise break-up of the additional deposits of Rs109 billion shows that the largest increase of Rs58 billion was recorded in non-remunerative current accounts followed by Rs47 billion in saving deposits. This explains how the bank deposits grew despite the fact that the weighted average return on them remained lower than inflation in April-June this year. A growth of Rs58 billion in the current accounts during this period means that the banks did not have to give any return on Rs58 billion out of the total Rs109 billion worth of additional deposits they had mobilized. That left enough room for individual banks to offer higher returns on their share in the additional deposits of the remaining Rs51 billion, without increasing the overall average rate of return.

The fact that Rs58 billion or 53 per cent of the total deposit growth of Rs109 billion came in current accounts also explains that the depositors had no choice but to keep this much amount with the banks. The reason is money has to be kept in the current accounts just to meet the current expenses — and not for investment purposes. Obviously then the question of the rate of return does not arise.

Further, since Rs47 billion or 43 per cent of the total deposit growth flowed into saving deposits one can infer that the depositors knew that they would earn low returns but had no better investment avenue open — at least for the time being.

Bankers admit that part of this money can move out for earning better returns somewhere else. But they say this would depend on the depositors’ perceptions, his willingness and ability to take greater risks, as well as on the overall interest rate structure in the country.