KARACHI, Sept 9: Race for consumer lending has put banks into cash crunch as they are burrowing from mutual funds at a much higher rate pushing the risk high for the both, said banking sources.

A number of banks have gone beyond their capacity to lend more and their advance to deposit ratio crossed 80 per cent and in some cases even higher than 100 per cent.

Most of the banks have made above 70 per cent advances of their deposits, while banks also are required to deposit 25 per cent with the State Bank.

The banks which have crossed 80 per cent advanced-to-deposit ratio (ADR) have no money to lend further but they are borrowing from mutual funds to either re-lend at 18 to 20pc for consumer financing or meet their paid-up capital requirement.

The banks have to meet minimum paid-up capital requirement of Rs3bn by December 31, 2006.

The five big banks are not behind the race as their advances except, NBP and HBL, have reached critical level despite their huge deposit base.

The ADR of MCB Bank was 72.4 per cent and the United Bank’s, which has deposit base of more than Rs325 billion, was 72.5 per cent on June 30, 2006.

Some new and aggressive banks have also gone beyond 80 per cent ADR. Faysal Bank’s ADR stood at 82.13 per cent and Union Bank (now acquired by Standard Chartered) at 80.42 per cent.

Small banks and Islamic banks represent more critical picture of their advances and deposits.

On June 30, 2006 the ADR of NIB Bank was 101.5 per cent, Meezan Bank 86.48 per cent, Bank Islami (much smaller deposit base) 165 per cent, Metro Bank 79.24 per cent, Bank of Punjab 73.16 per cent, Askari Bank 73.29 per cent and Bank AL-Habib 71.69 per cent.

The ADR of Allied Bank was 67.45 per cent but its deposit included huge amount of Rs4.794bn of Taiser Town applicants. After excluding this amount its ADR was 69 per cent on June 30, 2006.

“The mutual funds are getting as high as 11.5 per cent return by lending to banks,” said a banker. He said some big banks were also involved in this business while the small banks have made it a practice.

There has been warning from the international donors about the unchecked consumer financing which occupied about 22 per cent of the total bank financing in few years.

The last two and half years’ results showed that banks earned most of their money through interest income. Bankers said the credit demand was still high and banks would not stop lending even if they have to borrow at the rate above 10 per cent.

“This is a risky business for both the banks and mutual funds that are financing to earn more,” said an analyst.

He said the risk is high because in case of bad recovery from consumer financing the shareholders of mutual funds would suffer.

Banks have already neglected the depositors as they keep most of the profits and the depositors get negative returns in the wake of high inflation.

“The mutual fund industry should be careful as banks have no good record of recovery,” suggested the analyst.

“There is no chance that the SBP would take any step to check the rising consumer financing as it is the base of the economic growth and the government encourages consumer financing,” said a high government official.

He said the consumer-led growth still has vast potential and banks have the best chance to cash in the opportunity which may not continue for a longer period.