Saudi Arabia needs to inject fresh liquidity into its banks to allow them to meet lending commitments after a sharp growth in credits and a slowdown in deposits, the Kingdom's largest bank said yesterday.
The government should also retire debt owed by its affiliated organisations to banks and raise the ceiling on the loan-to-deposit ratio to tackle a possible cash crunch, the National Commercial Bank (NCB) said in its weekly bulletin.
The bulletin noted that the lending capacity of Saudi Arabia's banks is approaching its limit, as evident from a loan-to-deposit ratio that is near a record high as well as the dependency on a short-term deposit base.
In contrast to 2007, where private credit and deposits grew at 20.62 per cent and 21.4 per cent respectively, the pace of the corporate-driven private lending had exceeded growth in deposits in every month throughout 2008, the study said.
While the private credit growth in general and corporate credit growth in particular registered 31.9 per cent in November and 58.4 per cent in the second quarter of 2008 respectively, deposits grew by 19.4 per cent in November, it said.
Consequently, this propelled the loan-to-deposit ratio to a near record high of 90.3 per cent at the end of November, "which is only comparable to that of 2005, a time when consumer loans was leading the surge in lending".
According to the bulletin, the constraint had started to kick in, with private credit growth moderating in September and October to 33.8 per cent over the same period of 2007 and then declining to a 31.9 per cent in November. "Although the private credit growth will remain in an acceptable range that will attain a healthy growth in the non-oil private sector, the funding gap that had evolved in 2008 had to be addressed," the study said.
"Our recommendations include the injection of medium-term deposits by the government, whether through the Saudi Arabian Monetary Agency (Sama) or quasi-government agencies, which will provide fresh injection of deposits and immediate liquidity relief. We also propose the retirement of public debt held by the Public Pensions Agency and the General Organisation for Social Insurance, estimated at SR100bn (Dh97.8bn), that can trickle in the form of deposits."
NCB also proposed the Sama, the Kingdom's Central Bank, should ease what it called its implicit guidelines that do not allow the banks' loan-to-deposit ratios to cross the 85 per cent mark.
"In addition to the abovementioned loan-to-deposit constraint, the short-term nature of deposits represents another critical constraint for banks, forcing banks to lend at the shorter end of the curve," the bulletin said.
"The banks' credit classified by maturity in November illustrates this issue; with short-term credit weighing more than 63.6 per cent of total credit in contrast to a relatively meager 22.3 per cent for the long-term credit.
"Hence, this issue necessitates a deeper insight into the relevant courses of action that can provide the banking system with a
more stable funding base and, in turn, corporate Saudi Arabia with more than working capital."
Sama's figures showed credits extended by Saudi banks totalled SR654.5bn at the end of November, including nearly SR479.7bn as short term loans.
Deposits peaked at around SR853.9bn, including nearly SR345bn as time deposits and savings and around SR343b as demand deposits. Deposits by businesses and individuals stood at around SR321bn and those by government entities at nearly SR113bn.