Banks seem reluctant to extend loans in spite of an all-time low benchmark interest rate.
The trend is evident from the latest data released by the banking sector regulator. The growth rate of advances in 2015 so far is smaller than the comparable rise recorded in 2014.
What is more worrying, however, is the continuous decline registered in the advances-to-deposits ratio (ADR). It reflects total loans that a bank has extended as a percentage of the deposits it has received from customers.
According to data compiled by Topline Securities, the ADR at the end of the first nine months of 2015 clocked up at 51%, down from 53% recorded at the end of September 2014. In fact, the ADR at the end of the third quarter of 2015 is the lowest since 2010.
According to research analyst Umair Naseer, the banking sector has witnessed a major slowdown in advances growth since 2009. It has averaged 6% during the last six years versus the average growth of 21% in the preceding six-year period, he said.
“Bankers are of the view that credit growth may not witness any significant growth in 2015. However, the implementation of China-Pakistan Economic Corridor (CPEC) projects and an uptick in economic/industrial activity could lead to higher growth 2016 onwards,” Naseer said.
In the absence of other triggers, analysts are betting heavily on the $46-billion CPEC projects, which include the construction of 2,000-kilomtre-long road network from Gwadar to Kashgar, China, and power projects of over 10,000MW in the next 10 years.
In addition to slow growth in advances, one reason for a six-year-low ADR seems to be disproportionately high growth in deposits. Total deposits of scheduled banks rose by a five-year high rate of 9% over the first three quarters of 2015. The average nine-month growth rate of deposits over the last five years has been 5%, according to the analyst.
Amidst a decreasing ADR, however, banks continued to escalate their investments since 2011. Investments in the first nine months of 2015 grew 26% as opposed to 10% rise recorded over the same period last year.
Resultantly, the investments-to-deposits ratio (IDR) at the end of the third quarter of 2015 stood at 71% compared to last year’s 56%. In fact, the end-of-September IDR is the highest since 2010, which indicates banks’ preference for government securities, data compiled by Topline Securities shows.
Published in The Express Tribune, October 17th, 2015.
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