Banks’ Deposit Mobilization Slows Down

Deposit mobilization by Pakistani banks experienced a slowdown as their attention shifted towards increasing advance-to-deposit (ADR) ratios in the year concluding December 31, 2024, as indicated by the State Bank of Pakistan (SBP) in its Financial Stability Review – 2024, released on Thursday.

The report revealed that this transition led to a greater dependence on borrowing to finance asset expansion throughout the year.

The Financial Stability Review encompassed an assessment of the performance and risks associated with various segments within the financial sector. This includes banks, microfinance banks (MFBs), development finance institutions (DFIs), non-bank financial institutions (NBFIs), insurance companies, financial markets, and financial market infrastructures (FMIs).

Additionally, the report scrutinized the financial stability of the non-financial corporate sector, a prominent private sector user of bank credit.

Central bank statistics indicated that bank deposits totaled Rs30.28 trillion at the close of December 2024, following a peak of Rs31.34 trillion in September 2024, representing a decrease of Rs1.06 trillion, or 3.5%, during the final quarter of the year under evaluation.

The central bank noted that deposit mobilization lost impetus as banks focused on raising their ADR ratios, leading to increased reliance on borrowing to fund asset growth.

Banks’ earnings remained stable due to an increase in the volume of earning assets, although the decrease in interest rates resulted in a deceleration of earnings growth.

It was observed that banks endeavored to meet the government’s mandatory objective of boosting advances during the last quarter of 2024.

To meet this objective, banks were required to increase their advances (credit to the private sector) to 50% of their deposits to avoid additional taxes of up to 15%. Consequently, banks apparently prioritized lending to the corporate sector while being cautious about accepting new deposits throughout the year.

Subsequently, the government eliminated the ADR-based tax and raised the corporate income tax rate for banks by 5% to 44% in late December 2024.

According to SBP data, deposits have since reached a new peak of Rs31.63 trillion in March 2025.

The Stability Review report also highlighted that the deposit protection amount has been increased from Rs0.5 million to Rs1 million to strengthen depositor confidence and enhance safety nets.

The report further noted that Raast, the central bank’s instant payment system, maintained its growth trajectory, reaching approximately 40 million users and processing nearly 800 million transactions during the 2024 calendar year.

Furthermore, the credit risk profile of the banking sector did not raise serious concerns due to sufficient provisioning coverage of non-performing loans, as stated in the report.

The adoption of the new accounting standards IFRS-9 (International Financial Reporting Standard) is anticipated to improve banks’ risk management practices and increase their financial resilience to withstand loan portfolio delinquencies.

According to the SBP review, solvency indicators such as the capital adequacy ratio (CAR) of the banking sector improved further to 20.6%, remaining well above both the global standard and domestic minimum regulatory requirements.

The report concluded that macroeconomic conditions improved significantly during CY24, as evidenced by decreasing inflationary pressures and subsequent substantial monetary easing, fiscal consolidation, stable rupee-dollar parity, increased economic activity, and an improved external account balance.

In this environment, the financial sector, growing at a respectable rate of 17.8%, maintained its operational and financial stability throughout CY24.