KARACHI : Despite high growth of deposits the banks have to face difficult situation as the demand declined significantly in the first quarter of the current fiscal year, said the quarterly report of the State Bank, issued on Monday.

Aggregate Banking sector deposits rose by an unprecedented 4.1 percent during Q-1 FY-03, in contrast to a decline of 0.6 percent in Q-1 FY-02. However, on the credit side, banks faced a substantial contraction in demand, despite falling lending rates. The weighted average rate dropped from 14.4 percent in June 2001 to 11.9 percent in September 2002.

The report says that the first quarter of the fiscal year is generally a period of net credit retirement but the Q-1 FY-03 decrease in net credit growth was extraordinary (Rs 31.3 billion vs Rs 8.9 billion in Q-1 FY-02), the report said. The banking sector saw an increase of Rs 7.6 billion in deposits during Q-1 FY-03. This was in sharp contrast to falling deposits during the first quarter of the previous year, said the SBP report.

In dollar terms, FCDs recorded a positive growth by 23 million dollars. The report said the net credit posted a seasonal decline during Q-1, FY-003 as well. This was noticeably sharper compared to the first quarter of FY02.

The major decline can be explained by both higher retirement and the slowdown in fresh disbursement during the quarter. The State Bank expressed concern that bank net credit even failed to respond to considerably lower the lending rates. More surprisingly, net credit demand was depressed during Q-1, FY-03 despite a substantial improvement in economic prospects over the previous year. Within the banking sector, the nationalised banks saw the largest fall in net credit during Q-1 FY-03 against a marginal growth during the same period last year. The report says that an encouraging development during the quarter was a further decline in net NPLs of the banking sector by Rs 2 billion to Rs 232.6 billion.

Defaulted loans, on the other hand, recorded an upward trend, which is not a good sign, it said. The currency to deposit ratio, which measures financial intermediation, improved due to both a decline in currency in circulation and an increase in deposits, said the report. The rising trend in deposits post-September 11 continued in Q-1, FY03. In the face of falling interest rates, this indicated limited investment options. During the quarter, money market remained relatively liquid and the expectations of large interest rate cuts was expected.

Demand of government securities was also considerably higher during the said quarter as compared to previous year Q-1. This was because of ample liquidity inflows to the banks and their strategy to lock in the prevailing rates in anticipation of further decline.

In the first quarter, in overall terms the banks discounted Rs 144.1 billion, against Rs 161.5 billion in the same period last year. During Q-1 FY-02, the overall government borrowings were not only higher but also substantially sourced from the SBP, In contrast, the government continued to retire its debt to SBP almost throughout the first quarter of this fiscal year.

This, in turn, helped the SBP to almost completely sterilise the impact on reserve money of the increase in the NFA during Q-1 FY-03 that stemmed from SBP forex market purchases.