Pakistan’s banking industry suffers from short-termism just like many other sectors of the economy do. The industry, on the whole, makes little effort to mobilise long-term deposits. And that, in turn, makes it difficult for banks to offer long-term loans.

That is why they mostly provide short-term working capital to the private sector. And when it comes to investing in government debt papers, short-term Treasury Bills become their first choice. They invest in long-term Pakistan Investment Bonds only when the bonds offer very lucrative rates of return.

The central bank is supposed to ensure that all banks discharge their primary responsibility of financial intermediation efficiently. One way for achieving this objective is to incentivise banks to mobilise long-term deposits in the absence of which they cannot make enough long-term loans.

Only recently the State Bank of Pakistan (SBP) has done just that. While raising the cash reserve requirement or CRR for banks on Nov 13, it decided that one-year plus time liabilities of banks would continue to remain exempted from CRR. “This will encourage banks to raise more long-term deposits, which will facilitate asset-liability matching and enable banks to extend long-term loans for construction and housing finance,” the SBP said in a press release. Mentioning construction and housing finance was necessary for the SBP, perhaps, to remain on the “same page” with the government trying to give the construction sector a boost. But as a matter of principle, the central bank actually wants the banking industry to minimise the asset-liability mismatch that banks create themselves and then use as an excuse for not making enough long-term loans.

The increase in the number of total bank accounts that we keep hearing from the SBP is originating primarily from compulsory accounts — ie the accounts that individuals and firms and even receivers of the state cash-handouts must have with one bank or another

As of September 2021, only one-third of all bank financing was categorised as fixed investment or long-term loans which also included the post-Covid concessional long-term financing, SBP data reveals.

On the other hand, working capital constituted about 40 per cent of total bank financing — even without including short-term import/export financing. These numbers are derived from the stock of the total financing and may not reflect the same proportion of short-term and long-term financing being offered currently. But they do reflect the trend.

The reasons why banks remain shy of offering long-term finance are many and diverse. But the most important one is that they do not have enough matching long-term fixed deposits. As of June 2021, only 8.5pc of the banking systems total deposits worth Rs19.135 trillion fell in the category of fixed deposits of one year or longer tenure.

This situation is far from ideal. Banks need to roll out more financial products to attract long-term fixed deposits. And, the central bank needs to keep pushing them to do that. Keeping one-year plus time deposits exempted from CRR to encourage banks to mobilise more long-term deposits is good. But the central bank must also seek feedback from banks on what keeps the share of fixed deposits low in their total deposits. And, after examining that feedback on merit it may consider designing a “carrot-and-stick” policy for banks to enhance the share of long-term deposits in their overall deposit base.

Banks often complain that high rates of return offered on long-term National Saving Schemes (NSS) makes the task of long-term deposit mobilisation difficult for them. The government normally pays a little higher return to widows and senior citizens when they invest money in NSS. And, that makes sense. But on other NSS instruments, the rates of return are only moderately higher than what banks could easily pay on deposits of similar tenure if they (1) come up with customer-friendly features of long-term deposits and (2) make stronger efforts to cut the cost of deposit mobilisation, in particular, and their overall cost of operations, in general.

Most of the growth originating in the deposit base of the banking system is due to the incremental current account and saving account deposits.

Every government pushes the agenda of greater documentation of the economy — and rightly so. Such documentation drives eventually make it mandatory for individuals and businesses to open and operate bank accounts though they seldom bring in top tax-evaders in the tax net.

Transfer payments through bank accounts in social sectors via welfare programmes like Ehsaas also lead to an increase in the number of bank accounts, most of which are current or saving accounts. The phenomenal growth in recent years in domestic e-commerce should also be credited for increasing the number of bank accounts.

In all such cases, banks’ own efforts for encouraging people to open bank accounts remain nominal. Worse still is the fact that despite the total number of bank accounts increasing due to the factors listed above, banks apparently do not use this factor to help them generate more long-term deposits. Short-term deposits in such accounts grow, however. And, the growth rate depends upon the overall economic situation and specific needs of account holders.

A closer study of the structure of banks’ deposits lends some credence to the above analysis. In June 2019, the total number of banks’ deposit accounts stood above 54.134 million. In June 2021, this number shot up to 66.884m — a neat addition of 23.5pc within two years, according to the SBP stats. Dissecting these numbers we find out that in June 2019 current deposit accounts constituted 61.6pc of the total bank deposits.

Comes June 2021 and current deposit accounts make up 66pc of the total deposit accounts. This situation is not conducive to growth in savings and investment. And it clearly indicates that the increase in the number of total bank accounts that we keep hearing from the SBP is originating primarily from “compulsory accounts”— ie the accounts that individuals and firms and even receivers of the state cash-handouts must have with one bank or another.—MA

Published in Dawn, The Business and Finance Weekly, November 22nd, 2021