KARACHI, April 3: Both local and foreign banks operating in Pakistan saw a net increase of Rs150 billion in their combined deposit base in the first eight months of this fiscal year.

Data released by the State Bank shows that domestic deposits of all the banks combined rose to Rs1838 billion at the end of February 2004 from Rs1688 billion at the end of June 2003.

This nine per cent growth in the deposit base of the banking system took place despite falling rates of return on deposits: weighted average return on bank deposits fell to 1.33 per cent at end-February 2004 from 1.90 per cent at end-June 2003 showing a decline of 57 basis points.

What helped banks expand their deposit base at cheaper rates was that overall interest rates were falling and there was a lot of liquidity in the economy.

Though slightly lower than in a year-ago period remittances from overseas Pakistanis kept flowing in in a big way. Pakistan attracted $2.513 billion in July/ February 2003/04. This huge inflow of remittances served as a prime booster for the bank deposits. Money sent back home by expatriate Pakistanis is most often converted into rupees by the recipients. In that case it expands the rupee deposit base of the banking system. But some times the remittances from Pakistanis living abroad are also held in foreign currency accounts. When that is the case the foreign currency deposit base expands.

But whether the remittances are put in local currency or in foreign currency they have an impact on overall deposit base of the banking system that includes both the rupee and foreign currency deposits. Foreign currency deposits of the banking system rose from $2.30 billion at end-June 2003 to $2.74 billion at end-February 2004 showing an increase of $44 million. That indicates that out of the Rs150 billion increase seen in bank deposits in eight months to February 2004 more than Rs25 billion (the rupee equivalent of $44 million) were maintained in foreign currency.

Policy makers and top bankers say in defence of the falling deposit rates that the rates seem sustainable because of the fact that the deposit base is expanding. They can cite a huge expansion of Rs150 billion in the deposit base of the banking system in eight month to February 2004 to substantiate their argument.

The Rs150 billion low-priced deposits (mobilized at weighted average rate of 1.33-1.90 per cent) enabled the banks to make new loans - and at cheaper rates. In eight months to February 2004 total domestic advances of all the banks combined went up from Rs1069 billion to Rs1232 billion showing an increase of Rs163 billion. At the same time weighted average lending rate went down 7.58 per cent to 5.30 per cent.

Not only did the banks lent more - and at cheaper rates - during July/February 2003/04 they also made more investments during this period. Total investments of all the banks combined rose from Rs724 billion to Rs744 billion during this period showing a net increase of Rs20 billion. They not only made investments in the government securities like treasury bills and Pakistan Investment bonds but in all permissible modes of investment including shares and term finance certificates etc.

Commenting on banks deposit mobilization in the second quarter of this fiscal year, the State Bank says in its second quarterly report it was driven primarily by four factors: (i) large inflows of remittances from overseas Pakistanis (ii) improving economy (iii) higher credit offtake; and (iv) a sharp fall in investment in national saving schemes (due to frequent cuts in NSS rates).

During July/February 2003/04, the government twice reduced the rates of return on NSS first in July 2003 and then in January 2004. In July 2003, the rates of return were cut down from 8.67 per cent to 7.67 per cent on three-year Special Saving Certificates; from 9.12 per cent to 7.68 per cent on five-year Regular Income Certificates and from 10.03 per cent to 8.50 per cent on 10-year Defence Saving Certificates.

In January 2004, the rates were further lowered to 7.16 per cent on SSCs; 6.96 per cent on RICs and 7.96 per cent on DSCS.

This contracted net investment in NSS to Rs2.9 billion in seven months to January 2004 down 94 per cent from Rs48.4 billion in a year-ago period. Naturally then it brightened the scope for the banks to raise cheaper deposits.

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