While most of the world was focusing on fiscal and monetary stimulus packages, Pakistans economy under the IMFs rescue package - which meant a big no to monetary stimulus - has been witnessing the diversion of majority domestic savings to support fiscal financing and to feed public sector entities at the cost of industry and consumers.
This coupled with economic slowdown and bleak security situation strongly influenced the flow of deposits to the banking system as well as the assets allocation strategy in the course of last year or so, as cited by central bank in its recently published quarterly banking system review.
The private sector has been hit by two back to back related economic developments; a) attractive rates for NSS and the bias of public institutions towards saving schemes are eroding the growth in deposits base, and b) within less mobilized deposits, the investment in government papers and high proportion of credit raised by public sector entities are reducing the size of credit pie available to the private sector.
Nonetheless, banks reluctance to lend private sector and low appetite of ailing industrial sector in a high interest rate environment is also partially responsible for this shift in trend. Had it been a low interest rate environment with a liberty to print high powered money, the situation could have been different. But, there are lots of ifs and buts in this hypothetical scenario without IMF stringent conditionalities.
But lets not delve into this debate and just narrate the facts. The government raised Rs255 billion from NSS during Jan-Sep 09 as compared to Rs87 billion in FY08. This limited the growth in banking system deposits to mere Rs266 billion versus Rs363 billion in 2008.
Most of those deposits mobilized are by the government through T-Bills and PIBS - as investment-to-deposit ratio jumped by 10 percentage points to 35 percent in a year time by Sep 09, whereas, the advances-to-deposits ratio, in the similar period, declined from 76 percent to 70 percent. The situation is even worse in the last quarter, during Jul-Sep 09 when the deposits base eroded by Rs80 billion while the size of National Savings Scheme rose by Rs63 billion and with a whopping Rs184 billion increase in banking investments, net advances reduced by Rs64 billion. To add to the agony, the NPL-to-loans ratio increased by 90 basis points to 12.4 percent, after remaining stagnant in the previous quarter. More on this is later!