Investment-to-Deposit Ratio Surges to 85% in January As Banks Seek Inflationary Cover

Banks’ investment-to-deposit ratio (IDR) surged by 12.5 percentage points to a new high of 85 percent in January 2023 as the State Bank of Pakistan (SBP) continues to inject more cashflow in the open market to help local banks meet growing financing demand coming from the government.

Local banks see this as a cover against Pakistan’s high-rise inflationary environment which has made business obsolete and yield-hunting a dismal affair.

According to JS Global, the IDR increased from 72.3 percent in January 2022 to 85 percent as of January 2023. Meanwhile, the gross advance-to-deposit ratio (ADR) increased by 1.4 percentage points to 51 percent in January amid significant growth in deposits over the past year.

The government continues to be the largest borrower from commercial banks, as its reliance on borrowing is increasing due to a surge in interest payments on debt, pending IMF bailout, and a sharp slowdown in fresh foreign inflows from bilateral and multilateral creditors.

A banker commented that the IDR of banks is growing because the central bank is pumping more money into the system. Due to the higher interest rate environment and the government’s growing funding requirements, banks are making significant investments in treasury bills and bonds. While ‘civilian’ financiers remain unfazed due to low-profit rates on the bills, commercial banks will only continue to be more involved and facilitate government borrowing while SBP releases more PKR into the market to let it happen, he added.

“OMO is a shortcut for managing liquidity in the banking system. SBP has injected massive sums into banks this FY to meet fiscal demand. Upcoming monetary policy could be decisive. Banks make most of their hard cash in times of inflation,” he further stated.

SBP conducted a Shariah-compliant Mudarabah Open Market Operation (OMO) on Monday, in which it injected Rs. 125.6 billion into the market for 4 days at a 17.08 percent rate of return. The surge in OMOs since June 2022 shows how foreign inflows have toned down.

In any case, lending rates are expected to rise in the coming months as commercial banks seek protection in a high inflationary environment like Pakistan.

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