By the end of September 2024, bank deposits in Pakistan reached an unprecedented Rs. 31.34 trillion, marking a significant milestone in the country’s financial sector. This represents a robust year-on-year increase of 19.1%, according to the latest data released by the State Bank of Pakistan (SBP). The surge in deposits highlights the strength of the banking sector, even amidst challenges like changing interest rates and shifts in economic conditions.
This new record follows the earlier peak of Rs. 31.12 trillion recorded at the end of June 2024. The recent data also indicates a month-on-month rise of 1.82%, with deposits increasing from Rs. 30.78 trillion in August 2024. The increase in deposits can be attributed to elevated interest rates, which made bank savings an appealing choice for individuals looking for stable and high returns. However, a recent reduction in interest rates has tempered the pace of deposit inflows, showing a shift in the dynamics of the banking market.
In July and September 2024, the SBP implemented policy rate cuts totaling 350 basis points, resulting in a cumulative reduction of 450 basis points since June 2024. This move was largely driven by a continuous decline in inflation, providing some relief to borrowers but also influencing deposit growth patterns. Despite these adjustments, the overall deposit growth remains strong, reflecting confidence in the banking system.
The SBP’s Annual Report for the fiscal year 2023–2024 highlighted a key trend in the currency-in-circulation to deposit ratio, which has declined due to the increased flow of deposits into the banking system. This trend reflects the government’s growing reliance on domestic banks for financing its budget deficit, especially in the face of reduced external funding sources. As a result, banks have directed a substantial portion of these deposits into government securities, with demand for private-sector credit remaining relatively subdued during FY24.
The banking sector’s advances reached Rs. 12.31 trillion as of September 2024, which marks a year-on-year increase of 3.8% and a month-on-month rise of 4.2%. Meanwhile, bank investments rose sharply to Rs. 30.70 trillion, representing an impressive 35.7% growth compared to the previous year. Although this growth in investments was substantial, there was a slight monthly decline of 1.1%, reflecting the dynamic nature of market conditions.
Private-sector credit demand, which had been sluggish during FY23, began to show signs of recovery in FY24, which ended on June 30, 2024. The uptick in credit demand was driven by a gradual increase in economic activity and sustained cost pressures across industries, prompting businesses to seek working capital loans. In FY24, private-sector credit grew by 4.0%, a noticeable improvement over the 2.3% growth recorded in FY23.
Despite the recovery in private-sector credit, banks have continued to prioritize low-risk investments in government securities, partly due to the government’s increased borrowing requirements amid rising interest rates. This trend has led to a decrease in the advance-to-deposit ratio (ADR), which fell to 39.3% in September 2024, down from 45.1% in the same period last year.
With the government’s borrowing needs now declining, thanks to improved dividend income and foreign financial inflows, banks face the challenge of managing excess liquidity. The SBP has set a target for banks to achieve a 50% ADR by December 2024, with those falling short facing additional taxes. This policy measure underscores the need for effective liquidity management in the banking sector.
As of September 2024, the investment-to-deposit ratio (IDR) reached 97.9%, a significant increase from 86% in the previous year. This shift reflects the broader transformation underway in Pakistan’s banking sector, with a continued focus on balancing risk management and capital deployment strategies.
The record-breaking growth in bank deposits and the evolving dynamics of the sector illustrate the resilience and adaptability of Pakistan’s financial institutions. As the country navigates changing interest rates, evolving regulatory landscapes, and shifting economic conditions, the focus remains on maintaining stability while fostering growth. With strong deposit inflows and a commitment to aligning investment strategies with economic needs, the banking sector is poised to continue playing a pivotal role in Pakistan’s economic future.