KARACHI: The stock of investments held by scheduled banks at the end of July amounted to Rs14.1 trillion, up 30.4 per cent from a year ago, data released by the State Bank of Pakistan (SBP) on Tuesday showed.

The sharp increase in banks’ lending to the government through risk-free instruments like Treasury bills (T-bills) and Pakistan Investment Bonds (PIBs) is partly a result of Islamabad’s inability to borrow from the central bank under the International Monetary Fund (IMF) loan programme.

Government borrowing from the central bank for budgetary purposes is inflationary and thus restricted by the IMF. One of its inadvertent outcomes is the crowding out of the private sector: access to credit becomes difficult for businesses as they compete against the government, which offers risk-free investment avenues to the banking sector.

The SBP data shows the stock of advances or loans extended by the same banks over the preceding 12 months grew 9.3pc.

Banks are placing their excess liquidity in government papers owing to muted growth in advances, a recent research report by Topline Securities said. The source of their excess liquidity is deposits, which amounted to Rs18.8tr at the end of July, up 16.8pc from 12 months back.

Growth in deposits, which was the highest in 14 years during 2020-21, has been fuelled by higher remittances that increased 27pc in the last fiscal year to $29.4 billion. In addition, cash-based business activity was also restricted due to Covid-19, resulting in an increase in banking deposits, the research report said.

Analysts say the regulator’s attempt to promote digital transactions has resulted in high deposit growth. The increase in digital transactions means money stays in the banking system and never gets converted into hard cash. This reflects in deposits that banks later deploy in investments.

Speaking to Dawn, Pakistan-Kuwait Investment Company Head of Research Samiullah Tariq said the rise in investments was on the back of spare liquidity in the banking system last year.

“The balance-of-payments was in surplus.

Hence, the increase in net foreign assets was significant. Deposits registered a big jump, and all that additional liquidity ended up as risk-free investments,” he said.

He noted that banks should actively try to lend more to the private sector. “What happened last year was good for the banking system in a way that it improved its capital adequacy. Better capital adequacy helps commercial banks make more loans in the future because the risk weight of such investments i s zero,” he added.

Published in Dawn, August 11th, 2021