The quarter-end period is typically a busy time for businesses all over the world. Accountants are working to keep the books in order, marketing departments are maximizing their performance, and sales teams are rushing to fill orders. It’s the adult equivalent of working all night to get through a semester of putting off exams.
This is done in a slightly different way in financial institutions because some of the key performance indicators are related to the sale of line items on balance sheets rather than actual products. As a result, as long as you have liquidity from a few different sources, you can easily boost numbers. Similar to when you apply for a student visa and convince a wealthy relative to deposit the required sum as income proof.
This is known as “window dressing,” and financial institutions have been doing it since the beginning of time. For the bragging rights they bring, deposits and the asset base are typically the indicators of preference, but it can be anything. Toward the end of the quarter, bankers frequently turn to their friends in corporations or funds for short-term liquidity.
However, there was a slight variation in the degree and type of window dressing at the end of September. Although a few corporations and funds may have made a few hundred billion dollars in short-term deposits, the asset side, particularly advances, saw the most significant change. Loans to non-banking financial institutions (NBFIs), such as microfinance or development finance organizations, reached Rs446.4 billion in one month, an increase of Rs259.7 billion, according to the State Bank of Pakistan. To put it another way, the increase was greater than the outstanding amount for August.
Banks have been lending a lot since the return of the tax on not meeting the minimum ratio of advances to deposits. To put this into perspective, the total increase in net advances made by microfinance banks between FY17 and FY24 was Rs266.3 billion, or Rs9.5 billion per quarter on average. In a similar vein, as of June, development finance institutions had a net loan book of Rs190.6 billion, up an average of Rs4.1 billion per quarter since FY17.
Simply put, the NBFIs are unable to absorb this much capital in a single month, if not for subsequent lending. So, what’s going on here? Sadly, the narrative is quite straightforward and well-known. The sector was hit hard when the ratio of advances to deposits fell to just 38.36 percent by the end of the month as a result of the return of the tax in August.
By the end of the year, deposits will reach Rs31.7 trillion, assuming that their previous growth pattern continues. This means that, in comparison to August’s Rs11.81tr, the minimum advances needed to avoid the tax by year’s end must be Rs15.85tr. With only four months remaining, the effort to close the gap was thus initiated.
To state the obvious, banks would not be able to lend Rs 4 trillion in such a short amount of time. What, then, can they do? Simply turn to their less fortunate friends who have smaller licenses and write them large checks to boost loans to NBFIs. Microfinance and development finance players can then use those funds to invest in government securities.
Keep in mind that these are all-around numbers, and there is clearly a difference between banks. An earlier study by Data Darbar found that as of June, only four of the 20 listed banks had an ADR of more than 50 percent. The leadership appears to be doing everything in their power now that they are confronted with the additional tax, and one sure path is just fancy window dressing.
This is supported by data: Credit to the non-government sector increased by Rs447 billion between August and September, with loans to NBFIs accounting for 60%. Large corporations, particularly manufacturing, which saw an increase of almost Rs 80 billion, are most likely the remaining beneficiaries.
Funny thing is, this may not be the first time. The banks did likewise move in December 2022, when credits to NBFIs worked on the ADR by 423 premise guides in a solitary month toward stay away from the expense, which was in the end conceded. Right around two years after the fact, the playbook hasn’t changed by any means and neither has the public authority got the hang of anything.
