ByKarachi, Pakistan: Pakistani banks have successfully navigated the government’s ambitious advance-to-deposit ratio (ADR) target, reaching nearly 50% by December 6th. This achievement comes as a relief to the banking sector, which faced the threat of an incremental tax if they failed to meet the 50% threshold by the end of the year.
To achieve this target, banks significantly increased lending to the private sector, with a 27% growth recorded in just four months. This surge in lending, however, was driven largely by the fear of facing additional taxation.
Navigating the Challenge
The government’s imposition of the ADR target in the FY25 budget presented a significant challenge for banks, especially with the policy rate at 22% and the initial ADR hovering around 38%. To meet the target, banks faced the difficult task of increasing lending while managing their liquidity.
Liquidity Management Strategies:
- Aggressive Lending: Banks significantly increased lending to the private sector, reaching a record high of Rs1.35 trillion in the first five months of the fiscal year.
- Investing in NBFIs: A significant portion of excess liquidity, amounting to Rs1.33 trillion, was parked in non-bank financial institutions (NBFIs).
Government Borrowing and Impact on Liquidity:
The government’s reduced borrowing compared to the previous year also contributed to increased liquidity in the banking system. This unexpected liquidity surge posed a risk to banks as they faced the possibility of paying the ADR tax if they failed to meet the 50% target.
Impact on Interest Rates:
To manage liquidity and meet the ADR target, banks began lending at rates lower than the Karachi Interbank Offered Rate (Kibor), which could potentially impact their profitability.
Concerns Regarding Future Taxation:
While banks have successfully met the immediate target, concerns remain regarding the government’s potential plans to impose a tax on annual average ADR. Bankers fear that such a move could discourage lending and negatively impact economic growth.
Looking Ahead:
The current interest rate environment, with Kibor at around 12% and the policy rate at 13%, indicates a potential for further monetary easing, provided inflation remains under control. This could create a more favorable environment for both banks and borrowers.
