KARACHI, March 9: Banks’ advances to deposits ratio touched a record high level. Such a high ratio in a developing economy could prove dangerous and exposes viability of the banking industry to risks, as banks can face difficulty in honouring depositors’ demand for withdrawals in case of a run on the deposits.
The rampant credit lending, which has been yielding record profits for banks during the last couple of years, has shrunk the capability of banks to pay back to their depositors in case of panic withdrawals.
These higher level of advances also reduced SBP’s chances to sell its treasury bills as the banks are short of liquidity.
Latest figures provided by the State Bank showed that banks’ total advances to depositors have reached 77.64 per cent which, experts say, never happened in the banking history of Pakistan. The experts also maintained that this high level of advances was against the world standard and was prone to panic.
By the end of February 2006, banks’ total deposits were Rs2,630 billion and their advances reached Rs2,042 billion, which shows that advances to deposits ratio is 77.64 per cent. Banks are bound to keep 15 per cent SLR (Statutory Liquidity Requirement) and five per cent cash with the SBP. This means banks have already used another 20 per cent, thus they have only 2.34 per cent liquidity for utilization and paying back to the depositors.
“This is an alarming situation as any incident in this regard could trigger panic, as banks are not in a position to meet depositors’ demand of liquid cash,” said an analyst.
Bankers said there was no restriction on them for credit lending. The State Bank has been trying to curtail credit lending through tight monetary policy but the effort looks failed.
The credit to the non-government sector has already crossed the last year’s figure, and during the last eight months it reached Rs295.872 billion as against Rs292.044 billion in the corresponding period last year.
The credit to the private sector has reached close to the last year’s figure, while government’s borrowing for budgetary support has gone far beyond the whole year target within eight months. The government’s borrowing has gone up to Rs144.672 billion against the whole year target of Rs98 billion. Similarly, credit to the private sector reached Rs295.829 billion as against Rs309 billion during the last eight months.
It is surprising to note that there is no limit for credit lending by banks and they have not even adopted any plan to face any untoward situation. The SBP has not yet issued any guideline to protect the interest of depositors which is a primary function of the central bank.
The SBP also avoids guiding banks in case of increasing banking spread, which earns billions for banks but brings negative return to the depositors. Banks feel free to yield maximum from depositors’ money without any limit or restriction from the central bank.
Figures show that banks’ total investment has reached Rs759 billion, or 28.85 per cent of deposits. However, they have no more liquidity to invest in government security.
This resulted in stuck up of Rs515 billion T-bills with the SBP. The central bank is unable to sell all these in the market because of shortage of liquidity but pays an amount equal to Rs515 billion to the government. This will ultimately increase inflation which is already going out of control.
“The SBP did not devise any strategy to limit the dangerously increasing advances that could fail many banks, especially small banks once a panic emerges from any quarter of the economy or disturbance in political equilibrium,” said economist Abid Hai. He suggested that the SBP should come out with a shield to protect depositors’ hard earned money.
Economists and analysts were of the view that monetary growth was a direct impact on the unlimited credit growth. They held the government responsible for this growth.
The SBP has been making efforts to curtail the credit lending through tight monetary policy but the government wants to see money flowing towards the market and industry, which could provide it a chance to achieve economic targets, including seven per cent GDP growth. After the devastating earthquake in October 2005, the government insisted that it would not hit the GDP growth target. But the analysts believe that the government has chosen a wrong path to achieve the target by inflating the economy.
