HEAVY investment by banks in risk-free government securities has widened the gap between the rates of growth in deposits and advances.

As a result, advances to deposit ratio has shrunk despite a surge in bank lending for the private sector.

Banks’ overall deposits grew at 12.6 per cent per annum ending April this year but advances showed a much slower growth — 4.8 per centonly, according to latest data released by the State Bank of Pakistan. Accordingly, advances to deposit ratio (ADR) declined to 60 per cent in April 2012 from about 67 per cent in April 2011. The reason: banks invested about 44 per cent more funds mostly in government treasury bills and bonds and also in stocks and other approved securities.

In absolute terms, banks added Rs930 billion more to investment portfolio in the year to April 2012 whereas their advances during this period went up by just Rs165 billion. And all this happened while banks’ deposits’ base expanded by Rs800 billion.

In other words, banks’ additional investment was larger than the overall increase in their deposits. “This is not prudent banking at all,” quipped a senior central banker.

“The reason why you see our investment growth outpacing rise in deposits is because the base of deposits is much larger than the stock of investment—about twice as much,” explained head of a local bank. (By April 2012, deposits of the entire banking system totalled Rs5,935 billion out of which Rs3,055 billion represented the overall stock of investment).

“Things have begun to change. The demand for private sector credit is up and this year’s private sector lending of banks is more than double what it was last year,” said head of another local bank.

“I believe that continuing appetite for private sector credit would enable banks to reduce their over-dependence on investment in government securities.” Banks’ net lending to the private sector so far this fiscal year (up to May 4) totalled Rs251 billion against that of Rs112 billion in the same period of the previous year.

Most of the bankers put part of the blame for unusually high growth in bank investment at the government’s door. “For heaven’s sake why is this hype of over-investment ? When the government comes in to borrow (through bills and bonds) banks have to decide from the point of view of their profitability if they should lend or not. That is so simple,” said a senior executive of Habib Bank.

“Besides, if banks don’t invest in bills and bonds when there is an opportunity out there, where on earth they would employ liquidity? Excess and unemployed liquidity ruins the entire system: it means crash in interest and deposit rates, losses on bank balance sheets and disappointment among depositors which may further deteriorate saving rates.”

Bankers say that the often-neglected, reason for deterioration in advances to deposit ratio this year is that public sector enterprises (PSEs) are not borrowing from banks—they are retiring old loans. “Our lending to PSEs is classified as advances. ADR of banks would naturally decline if their advances to PSEs come to a halt,” said treasurer of a local bank. Between July 1, 2011 and May 4, 2012, PSEs retired Rs134 billion of bank credit, with no net borrowing.

Negative growth in lending to PSEs is adjusted accordingly,“which is why despite more than 100 per cent increase in private sector lending by banks (so far this fiscal year) the banking industry’s ADR does not look impressive.”

Excessive government borrowing from banks, which is at the root of such key issues as low growth in advances and deterioration in ADR, is going on as usual. So far this fiscal year (up to May 4), the federal government has borrowed Rs613 billion from commercial banks whereas it’s borrowings in the comparable period of the last year was 38 per cent less or Rs382 billion.

“Before the close of the fiscal year, this amount may rise further,” according to a senior official in the ministry of finance “as the government is trying to contain its more inflationary borrowings from the central bank.”

But he was of the view that it is not just higher government borrowings from banks that result in deterioration of banks’ ADR. “After the global recession of 2008-09 and a consequent slowdown in domestic economy, banks had almost stopped giving fresh loans to the private sector fearing defaults. They’ve come out of this fear but are still reluctant to reach out to the borrowers they way they should. Besides, banks really need to curtail operational expenses and cater to neglected potential borrowers.” —Mohiuddin Aazim