Ways And Means Of Deposit Mobilization Finance Essay

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In wake of the financial meltdown that started in 2008, financial institutions were the worst beneficiaries of the global crises. Pakistan also was not spared and economically suffered a supply shock in the form of all time high oil prices which took the inflation to its all-time height to 22%. To manage these shocks Pakistan immediately hurried to IMF for bailout package for more than 10 billion dollars while SBP played its role by increasing the discount rate and other statutory requirement to curb the rising inflation while relaxing the capital requirements for banks. The aftershocks of the global meltdown in 2010 are still haunting the Banks in Pakistan, in shape of detoriation of quality loan portfolio. In 2008 alone the NPL portfolio witnessed an astonishing rise of 64.7% from 218 billion to 359 billion. This increase in portfolio detoriated the banking industry profit by 107 billion, which was 46 billion in excess of 2007, while in 2009, NPL portfolio rosed by 20.3%. The second major impact to the banking industry was the increase in cost of funding which surged from 4.3% in June 07 to 6.2% in June Dec 09 but has come down from 7.2% in March 09. Surprisingly the spreads didn’t shrink by dec 09 and remained stabled at 6.8%. The main reason is that the banks are cutting down the rates on deposits to maintain the spreads. On one hand the current deposits are increasing in the industry on the other hand saving deposits are substituting with fixed deposits which intails increases the cost of funds. This shift in the deposits is primarily attributed firstly to SBP incentive policy to mobilize long term deposits through CRR and secondly banks own initiatives to narrow the mismatch of assets and liabilities. And finally the last but not the least is SBP initiative to introduce a floor of 5% on saving deposits beginning June 2008 which increased the cost of funds by 56 bps. In 2010 Pakistan yet again witnessed a new shock in shapes of floods destroying the 70% of agricultural land. The Banking industry is yet to take the impact of these floods which could actually hit the SME sector in a very terrible manner, the impact of which would hit the dec 2010 results. The after shocks of these floods would again trigger the inflation rise to 25% as per the government statistics while IMF’s calls for 22% inflation, which currently is standing at 13%. HMB was not the exception to this aftershock phenomenon, but has greatly managed itself to maintain its profits by efficient management of expenses, change of leadership and lowering of cost of deposits. Nevertheless, the rising inflation would again bring in the new economic crises, which would take banking industry towards a point of saturation in terms of deposits and its cost while profits of the industry would be snatched by the rising NPL portfolio. The need is to gather the low cost deposits especially the current and saving deposits, for which there is a dire need to look for segments of customers which could provide such deposits,

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