While banks operate with a small base of term deposits, they have realised that the time has come to boost these deposits since they see an opportunity for long-term financing in the near future.

By end of June this year, term deposits (of one year and longer maturity) of all banks were equal to 22.2pc of their total deposits; no significant change is expected by this year end.

But bankers are aware that, going forward they will need more term deposits for their term financing which is expected to grow fast as the implementation of the $50bn plus China-Pakistan Economic Corridor projects gain momentum.

“Tenure mismatch is one of the precursors of several risks. The more a bank goes for long-term financing, the larger the back up of term deposits it requires,” says the head of credit division of one of the top five banks.

But since the tenure-wise composition of all banks differs and their ability, willingness and possibility of undertaking long-term financing also varies, “this issue (of the low share of term deposits) is being examined and flagged by every bank accordingly.”

Until the mid-1990s, big banks had enough term deposits. But though banking reforms during that period made banks leaner and cleaner, the growth in term deposits slowed.

The boom in the stock and in the real estate markets followed by a somewhat cyclical boom and bust in these markets, plus unprecedented growth in National Saving Schemes and grey banking, made term deposits of banks the least lucrative option for customers.

On the financing side, a slump in foreign investment inflows after 2008 dampened the demand for project financing. There was no big challenge for banks owing to a tenure mismatch in assets and liabilities.

Following an international economic recession in 2001, banks found it more feasible to invest as much as possible in risk-free government debt papers, more so because the successive governments, too, were eager to borrow excessively as the private sector credit demand had weakened.

“Now, when we invest in government papers the question of tenure mismatch in assets and liabilities does not arise, as in the case of private sector lending, because of secondary market trading of securities,” explains a local bank treasurer.

Senior bankers point out that so far the private sector credit demand, particularly for long-term project financing, is not strong enough to push them to immediately augment term deposits.

“That’s why you don’t see banks in a hurry to do this,” says head of a mid-tier local bank. “On the contrary, you see most banks rolling out new schemes with value-added features to attract short term deposits.”

In many cases, loan packages also have features aimed to encourage borrowers to use them both as a window for borrowing and as a facility that treats the left-over amounts in their accounts as saving deposits.

By end of June 2016, saving and current deposits had a share of 43pc and 32.7pc in the banks’ total deposit base. Compare these numbers with those of 2011 and you can see the pace of growth in the last five years.

At end-June 2011, saving deposits were equal to 38pc and current deposits 29.2pc of total deposits. Term deposits at that time made up 25.4pc of all deposits, higher than the June 2016 level of 22.2pc.

Published in Dawn, Business & Finance weekly, November 14th, 2016