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Pakistan banks: driving engine of country’s economy

According to the latest data released by State Bank of Pakistan (SBP), overall deposits of Pakistan banks have grown by 17% to Rs17.1 trillion in 2020. The growth is the highest in 4 years and is better than 10-year average of 13%.

Growth in Deposits has been fueled by higher Remittances (+17.5%YoY in USD terms and 27.5%YoY in PKR terms during 11MCY20). It is also fears that the lack of business activity due to COVID-19 may have resulted in increase in bank deposits.

Investments have grown by 31% to Rs11.5 trillion in 2020. At the start of the year high yield on offer had already lured banks to move towards investments, which was compounded further as COVID-19 hit strangling business activity and in turn loan growth.

Advances grew by just 2% in 2020 as banks remained wary of overall economic conditions due to COVID-19. However, last quarter of 2020 for Advances has been relatively better with 3.4%QoQ growth. The aggressive cuts in interest rates by the central bank since March 2020 may be starting to reap fruits as the impact of COVID-19 pandemic also lowers and economic activity picks up.

Investment to Deposit Ratio (IDR) had already depicted an improvement to 67% in September 2020, which has been maintained at year end. To recall this was 66% in June 2020 and 60% in December 2019. The higher IDR is largely due to high interest rates at the start of the year and low appetite for risk (Advances) due to COVID-19. ADR has dropped to 48% from 49% in September 2020 (to recall, this was at 51% in June 2020 and 56% in December 2019).

M2 growth clocked in at 16% in 2020 primarily driven by the stellar deposit growth this year and a 19% increase in Currency in Circulation (CIC). CIC increased to Rs6.30 trillion by end December 2020, with CIC as a percentage of M2 clocking in at 29%, above past 5-year average of 27%. Reasons for increasing CIC can be attributed to low interest rates and evasion from tax authorities.

Going forward, analysts expect Deposit growth in the range of 12-14% during 2021, while Advances are estimated to grow by around 4-6%, where banks are expected to remain risk averse given concerns over further waves of COVID-19.


The SBP in a bid to support economic growth during COVID-19 outbreak introduced Temporary Economic Relief Facility (TERF) on 17th March 2020. Initially this program was aimed to incentivize setting up of new industrial units, but later Balancing Modernization and Replacement (BMR) of existing lines were also included in this scheme.

The facility was capped at Rs5bn/project for 10 years at maximum end user rate of 7% (SBP 3%, Banks’ spread up to 4%) against prevailing KIBOR rate of 12.3%. The end user rate was later revised down to maximum of 5% (SBP: 1%, Banks’ spread up to 4%) on 8th July 2020 (KIBOR 6.9%).

Analysts believe the companies will benefit in two ways: 1) interest savings to the tune of 500-600bps and 2) greater economic viabilities of expansions. The scheme is valid for projects, where LCs/ILCs are established by 31st March 2021.

This scheme has received strong response from businesses as requests for financings have crossed Rs500 billion mark. The approved financing against the same reached Rs278 billion, well above the initial threshold of Rs100 billion. Projects receiving financing are 346 as per 31st December 2020 data, out of 534 requests received.

Lending to farmers

Commercial banks disbursed Rs 1,215 billion to agriculture sector during FY20. This was 3.5% higher than the amount disbursed a year ago, but less than the target of Rs 1,350 billion, set by Agricultural Credit Advisory Committee (ACAC). Some factors which have constrained the growth of agriculture credit included: 1) impact of COVID-19 pandemic, 2) locust attack and 3) continuing issues like water shortage, low production of cotton and sugarcane, low off take of fertilizers and volatility in prices of agri produce etc. The outstanding portfolio of agriculture credit increased to Rs 581 billion by end June 2020, registering growth of 3.3% as compared with the last year’s position of Rs 562 billion. However, the number of agriculture borrowers declined from 4.01 million at end June 2019 to 3.74 million at end June 2020 due to the COVID-19 lockdown situation in the country.

The analysis of disbursement reveals that during FY20, five major commercial banks collectively disbursed agriculture loans of Rs 708.3 billion or 100.5% of their annual target of Rs 705 billion. As against this, specialized banks disbursed Rs 71.1 billion or 62.9% of their annual target of Rs 113 billion and fourteen domestic private banks as a group achieved 88.7% of the target by disbursing Rs 225 billion against their target of Rs 253.6 billion. Further, the five Islamic Banks as a group achieved 76.6% of their annual target of Rs 55.0 billion by disbursing Rs 42.1 billion which is 6.1% higher than the disbursement made during the corresponding period last year. Similarly, the Islamic windows of commercial banks disbursed Rs43.5 billion or 79.2% against the target of Rs55.0 billion during FY20 which was 33% higher from the disbursement of Rs 32.7 billion made during last year.

The agriculture credit of microfinance sector remained relatively sluggish due to COVID-19 lockdown in the second half of FY20. The Microfinance Banks (MFBs) as a group achieved 75.7% of the target by disbursing loans of Rs139.3 billion to small farmers which was 9.5% lower than the disbursement of Rs154 billion during same period last year. Likewise, the Microfinance Institutions/Rural Support Programs collectively achieved 73.4% of their targets by disbursing Rs28.9 billion which was 15 % lower than the disbursement of Rs34 billion made during the last year to small and marginalized farmers.

It is important to mention that SBP announced a comprehensive relief package in collaboration with stakeholders for relief of agriculture sector to deal with the adverse implications of the ongoing pandemic on the farming community and agriculture business in the downstream of value chains. These measures included deferment of principal and restructuring/rescheduling of agriculture loans were initially allowed up till June 30, 2020 have been extended up to 30 September 2020. SBP will continue to monitor the situation and it may introduce more measures to help the sector manage its finances during this temporary phase of disruption.

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