MOBILIZING DEPOSITS IN FINANCIAL INSTITUTIONS

TARIQ AHMED SAEEDI (tariqsaeedi@hotmail.com)
Nov 10 - 16, 2008

For keeping government borrowing under inflation-causing point, the present economic policies need to promote mobilization of short and long term deposits in financial institutions including scheduled, commercial, and specialized banks. While monetary measures like increasing rate of returns on saving accounts is in a way luring traffic of depositors and investors towards conventional investment avenues of financial institutions, dearth of will and trust are still keeping at distance significant volume of deposits from banking and financial system. The biggest challenge remains to attract them for rescuing Pakistan's economy fraught with liquidity crunch.

Credits of extension in deposit base can not be entirely transferred to recently adopted banking polices as for last five years total deposits have been experiencing an upward trend. However, consistent rise in currency circulation which is not signalling a positive sign to arrest inflation was relatively prominent according to result of Q1FY09. For example, Rs. 11 trillion was in circulation till end of September this year in a wide contrast to Rs. 8 trillion in the same month last year.

Total deposits including resident foreign currency deposits stood at Rs. 35.6 trillion at the end of September, 2008. Of that, Rs. 2.8 trillion was constituted by RFCD only. August figure of deposits was comparably better than that of two months of quarter since at the month end total deposits were Rs. 35.7 trillion while at July end these stayed at Rs. 35.4 trillion.

Within a span of five years, total deposits increased to Rs. 37 trillion at the closure of FY08 from Rs. 19 trillion at FY04 end.

Apart from this, cut in saving rate of national saving certificates in past hived off swarm of deposits into real estate and stock exchanges. Adequacy in saving mark ups recently diverted flows of investments to a certain extent. But, forming different modes of saving and earning on assets, capital market and fixed savings develop variable ways of offering returns on principals and vary according to magnitude of capital handled. Increasing rate of return on saving securities has extended in variety of optional investment avenues available to investors.

Expecting improvement in investment volume, therefore, Ministry of Finance has revised the fund generation target of national saving schemes of the current fiscal year to Rs. 150 billion. During last financial year, central directorate of national savings accumulated Rs. 86 billion through special saving certificates and other capital collecting operations. Revising upward to minimal 8.5 and maximal 13 percent rates of returns on saving accounts, CDNS will likely to attain the target.

Once mobilizing huge volume of capital of domestic and foreign origin, stock exchanges receded back in the tight grip of bear following freefall in values of stocks spurred by selling spree. At that time resistance could only be bolstered through imposing ban over sale of shares. The stock crisis peaked to a point that panic ensued about impending defaults of brokerage houses which might fail in paying back outstanding amounts. The decision of floor befitted untoward situation, according to few stock traders.

Substantiating stinginess of brokers, a realtor privy to a sagging brokerage house said that its owner had to sale its plots of DHA Karachi at a throwaway price of Rs. 12 billion to frontload cash in mounting debt obligations. The cost of these plots had possible market value of Rs. 48 billion, he revealed. He might have to gulp down another bitter pill of Rs. 20,000 million. Let alone other thing, this classified astronomical wealth of a single entity might be sufficient to at least crack in begging bowl of the poor nation.

FDI in financial sector also tended to increase in the first quarter of this fiscal year. Second after communication, financial business attracted $295 million FDI in the starting three months of this fiscal. Over a corresponding period of last financial year, it was 68 percent high, which is quite unusual if one considers deteriorating economic atmospheres and unpredictable political vibes.

Antagonists argue that it was predetermined commitments that made FDI way to Pakistan's financial sector. However, location of economies advantage ensconced in local financial market that both decreases operational leverage risks due to uncomplicated financial structure and beholds cultivable clienteles seldom gets hold of armed chain critics.

Above all, even if present fervent investment inflows in financial business of Pakistan was a result of prearranged promises, foreign banks can logically restrain themselves in making direct investment in infrastructure building by putting off decision to set up working branches in the country instead of engaging further into cost pulling affairs. Samba bank and RBS are typically manifesting optimistic expectations foreign bankers have about profitable operations in the domestic banking in the country.

In order to manage liquidity crisis facing by banks the State Bank of Pakistan introduced a major reduction in cash reserve requirement and statutory liquidity requirement on need based manners. It decided to slash CRR in phased manner. First reduction was carried forward to bring CRR to an average of six percent of total demand liabilities. And, next cutback was planned in mid of November, but it reduced reserve requirement to five percent before the scheduled date. The intention was clearly to meet shortfall as soon as possible in order to allay fear of burning stocks of FIs. Similarly, SLR has been fixed as nine percent of total demand liabilities.

Making borrowing from any source is not a healthy economic activity for a government. Control over expenditures can make the economy weather effects of the inflation. Special incentives to investors can be instrumental in expanding short and long term deposit base of the banking system.