The phenomenal growth in stocks is feeding on, among other things, banks’ fixed deposits, and there is no indication to suggest that this trend will peter out anytime soon.

Latest statistics show that by the end of 2013, deposits worth less than half a million rupees made up 41.2pc of total bank deposits. At the end of 2011, this percentage was almost identical —41.8pc.

“So, the recovery and rise of stocks in 2012 and 2013 have seemingly made no big impact on the structure of small bank deposits,” says a central banker. By extension, this also means that savings deposits, which make up more than one half of total deposits, have also not fed stocks in a big way. Volumetric growth in savings deposit — from Rs2.186tr by end of 2011 to Rs3.136tr by end-2013 — also reinforces this view.

Central bankers say a shift of money flow from banks to stocks or elsewhere can be better gauged by changes in the share of fixed deposits in overall bank deposits. Whereas the share of call and savings deposits increased from 54pc of total bank deposits at end-2011 to 61pc at end-2013, the share of fixed deposits decreased from 46pc to 39pc during this period. Even volume-wise, fixed deposits showed a nominal expansion — from Rs1.83tr in 2011 to Rs2.06tr in 2013.

Offering lucrative returns to lure fixed deposits is not easy because companies are using liquidity to expand their businesses, and individuals are hooked on such high-yielding investment modes like real estate and commodity futures

“The reasons for this change are diverse, but this is where we find a clue about people parking money elsewhere, including in the stock market,” says a senior SBP official. “And, as this change has coincided with the rise of the stock market, it can be assumed that some people didn’t roll over their fixed deposits with banks and invested the money in stocks.” (The Karachi Stock Exchange 100-index shot up from 11,348 points by end-2011 to 16,905 by 2012, and then to 25,261 points by 2013).

Bankers and stockbrokers say as the rising trend of the stock market continued through FY14 as well, it not only ate up banks’ fixed deposits, but also made investment in National Savings Schemes (NSS) shallower.

In FY14 (July 2013 to June 2014), investment in NSS nosedived to less than Rs200bn from over Rs380bn in FY13. “In FY13, investment in NSS had remained high alongside that in stocks because the rise of the stock market was driven more by foreign investors and large local investors,” says a KSE member. But from FY14, “we saw bulk entry of small investors in stocks, which I guess dried investment in NSS and must have also affected the growth of fixed deposits of banks.”

Bankers are concerned about what may happen if fixed deposits continue to fall. With the exception of a few dips in the stock market’s trading in August due to rising political temperature, the upward journey of equities has remained unaffected throughout the first seven months of this calendar year.

“This may already have eroded the base of fixed deposits further, though statistics on that are not currently available,” says the treasurer of a large local bank. “If the trend cannot be halted, are we going to see a big tenure mismatch in our long-term assets and liabilities?”

Two things complicate the issue further. Currently, project financing has picked up pace, though it remains centred on a few sectors. This requires banks to back up their long-term financial commitments with the assured availability of long-term deposits.

Secondly, offering lucrative returns to lure fixed deposits is not easy because companies are using liquidity to expand their businesses, and individuals are hooked on such high-yielding investment modes like real estate and commodity futures, points out another bank’s treasurer.

In FY14, banks’ credit to private sector soared to Rs384bn from a net credit retirement of Rs19bn in FY13. And the federal government’s bank borrowing plunged to Rs171bn from a peak of Rs950bn in FY13. Bankers say a significant part of private sector credit has gone into project financing, especially in areas like water and power infrastructure building, electricity generation, petroleum refining, food processing and packaging, chemicals and textiles.

If banks are unable to generate more term deposits, their interest rate forecasting will be affected, and project financing, already committed, would become difficult. The government’s resolve to continue to reduce the budget deficit is likely to keep its borrowing from banks limited.

“Whereas this would keep banks liquid enough to continue to lend to the private sector and carry out their project financing commitments, the problem is that too much liquidity would weigh on our interest income,” fears the head of a local bank.

Naturally then, banks would like to invest more in non-banking finance companies, in addition to lending to the private sector. Additionally, banks may also increase their investment in stocks, thereby helping the stock market sustain its growth trend.

Published in Dawn, Economic & Business, Aug 11th, 2014