Research Analyst
June 6 - 12, 2011

Savings accounts are accounts maintained by retail financial institutions that pay interest. These accounts let customers set aside a portion of their liquid assets while earning a monetary return. For the bank, money in a saving account may not be callable immediately and therefore often does not incur a reserve requirement freeing up cash from the bank's vault to be lent out with interest.


. CY07 CY08 CY09 JUN-10 SEP-10
Financial Institutions 174 211 195 197 146
Others 190 176 197 207 194
Current -Non remunerative 888 984 1,172 1,338 1,298
Savings 1,440 1,379 1,650 1,800 1,813
Fixed 1,162 1,467 1,572 1,585 1,570
Total Deposits 3,854 4,217 4,786 5,128 5,021

Withdrawals from a saving account are occasionally costly and are sometimes much higher and more time-consuming than the same financial transaction performed on a demand (current) account. However, most saving accounts do not limit withdrawals unlike certificates of deposit. With online accounts, the main penalty is the time required for the Automated Clearing House to transfer funds from the online account to a "brick and mortar" bank where it can be easily accessed. During the period when funds are withdrawn from the online bank and transferred to the local bank, no interest is earned.

In Pakistan, deposit base of the banking system is declining. However, investments in Central Directorate of National Savings (CDNS) instruments are growing, though at a slower pace, increasing their quantum as a percentage of banks' deposits to a 34.5 per cent during the quarter. Nevertheless, an appreciable increase in home remittances, which touched highest level in Aug-10, checked the decline in deposits to some extent.

Furthermore, all categories of deposits declined except saving accounts that marginally increased during Sep-10. However, the most obvious decrease took place in financial institutional deposits that declined 26 per cent and corresponded to similar contraction in transitory, liquid assets i.e. cash and treasury bank balances. The individual banks however showed varying performance in mobilizing and maintaining deposits. While deposits of most of the large-sized and small-sized banks contracted, a few medium-sized banks posted strong growth in deposits base: the decline in top 5 banks' deposits was greater than the overall decline in system's deposits and was moderated by increase posted by some of the medium sized banks.


Pakistan's banking industry still faces many challenges in terms of slackened economic activities that have squeezed profit margins of the industry as well as the repayment capacity of the borrowers. Moreover, the fiscal situation also was deteriorated as the government borrowed heavily from the banks for budgetary support, financing needs of public sector enterprises (PSEs), and commodity operations.

Accordingly, there was a shift in banks' credit to the public sector along with increased preference for top rated corporations over small and medium enterprises (SME) and consumers that are generally less resilient to economic slowdown and fragility in the operating environment.

Non-performing loans (NPLs) of banks and development financial institutions (DFIs) reached a new level of Rs589 billion at the end of the first quarter of CY11 mainly owing to slow economic activity and high interest rates. Total NPLs of banks and DFIs surged to Rs588.933 billion as on March 31, 2011 compared with Rs566.645 billion in December 2010.

Going forward, the increased credit risk will remain a major challenge for the banks. There is a need for banks to devise ingenious strategies for dealing with the high level of NPLs so that promising businesses, facing transitory difficulties only due to a constrained macro environment, continue to contribute in economic growth and service their obligations in an orderly manner. In addition, persistent macro-environment issues will pose a stiff challenge for some banks to enhance their minimum paid-up capital requirements (MCR) to Rs8 billion by the end of CY11.

During the quarter under review, the lending portfolio of banks registered a decline of two per cent vis-a-vis a 2.1 per cent decline in deposits. Moreover, banks' holdings of the government papers, which have been continually increasing since last quarter of CY08, also slightly came down.

In the backdrop of contraction in banks' earnings assets and deposit base, their reliance on borrowings also lowered by 8.4 per cent during Sep-10. This decline in end-quarter balances also reflected in average share of borrowings in overall fund base i.e. average borrowings as per cent of total asset lowered to 8.6 per cent in Sep-10 compared to 8.8 per cent in last quarter. Although, different components show that QoQ decline in borrowings was mainly contributed by secured borrowings, unsecured borrowings especially, the overdrawn Nostro accounts increased. The composition of borrowings accordingly shifted towards unsecured borrowings.


Over the last years, banks have undergone many changes as mergers and acquisitions, and regulatory changes shape the industry into one that provides more than just the traditional deposit and loan products. Success of banking industry lies in the effective use of policies and passing on its benefits to customers in terms of cost, speed and convenience.