Bank credit to the private sector for setting up new industrial units has continued to slow down as financial institutions have partially deviated from their principal objective of supporting industrialisation and shifted their focus to more investment in risk-free government debt securities like T-bills and Pakistan Investment Bonds (PIBs).

Banks’ strategy to remain in profit through maximum investment in government debt securities rather than taking calculated risks to finance new business ideas has hurt industrialisation, which is a good source of providing job opportunities in the country. Advances to the private sector grew 4% to Rs8.59 trillion by the end of March 2021 compared to Rs8.26 trillion in the same month of previous year, according to the central bank and Topline Research.

The 4% growth in advances is low when compared with the 10-year average of 9%, the research house said. The slowdown in advances was partly seen “as banks remained wary of overall economic conditions due to Covid-19,” the research house said in a commentary on Monday.

“Advances-to-deposit ratio (ADR) dropped to 48% as of March 2021 from 56% in March 2020,” it said. “To recall, it was at 47% in September 2020 and 56% in December 2019).” However, a sequential growth of 3.5% on a quarter-on-quarter basis was an indication of better economic activity over the past few months, it added.

On the contrary, banks’ investment in government securities grew by a significant 35% to Rs12.60 trillion by the end of March 2021 compared to Rs9.29 trillion at the end of March 2020.

“The excess liquidity is being placed in investments (primarily T-bills) due to a subdued growth in advances,” said the Topline report.

The investment-to-deposit ratio (IDR) had already depicted an improvement to 67% in December 2020, which increased to 70% by March 2021. It was 67% in September 2020 and 60% in December 2019, it added.

The significant growth in banks’ investment in government papers was seen since the government had adopted a policy of borrowing from commercial banks to bridge its annual budget deficit instead of borrowing from the central bank.

The government’s move is in compliance with the International Monetary Fund’s (IMF) conditions. The government ceased to borrow from the State Bank of Pakistan (SBP) through the printing of new currency notes, which was a cause of inflation in the economy, it was learnt. Banks invest in the sovereign papers and/or allocate credit to the private sector by attracting deposits from government offices, corporates and households. The growth in deposits surged to a 14-year high of 18.5% to Rs17.90 trillion by the end of March 2021 compared to Rs15.12 trillion by the end of March 2020. The surge in deposits shows the “highest growth in the March quarter in the last 14 years,” the research house said.

“Growth in deposits has been fuelled by higher remittances (up 29% in the last one year in dollar terms), while business activity (cash-based) was hindered by Covid-19, which may have also resulted in the increase in bank deposits.”

Besides, higher government borrowing from commercial banks to repay the maturing debt securities and to finance the budget deficit has also been a cause of the significant growth in bank deposits, as government offices mostly maintain their deposits at commercial banks, it was learnt.

Economist Shahid Hasan Siddiqui was critical of the banks for investing accountholders’ deposits heavily in government papers and extending very little to the private sector, which had the capacity to support economic growth and create job opportunities.

Senior banker Naved A Khan said the other day there was a great need to increase bank financing to the backbone of the economy like small and medium-sized enterprises (SMEs), agriculture sector and micro finance which could help in bringing people out of poverty.

Published in The Express Tribune, April 15th, 2021.

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