ByThe Pakistani government implemented a tax penalty on banks with an Advance-to-Deposit Ratio (ADR) below 50%. ADR reflects a bank’s lending activity compared to deposits. A low ADR indicates the bank is holding onto more deposits than lending out.
This tax became a burden for banks as interest rates attracted high deposits, but lending wasn’t keeping pace.
The Solution (and its Implications):
- Banks started charging monthly fees on high-value deposits (typically exceeding Rs 5 billion). This discourages large deposits and helps lower the overall deposit volume, consequently improving ADR.
Impact on Different Depositors:
- Individual account holders with massive deposits (rare scenario) can split their funds across multiple banks to avoid the fee.
- Government and private businesses with large deposits might face the financial burden if they keep the money in these fee-charging banks.
Possible Outcomes:
- Depositors may
- Move their funds to banks without the fee.
- Split their deposits across multiple banks.
- This might not significantly impact banks with excess liquidity.
- Banks might be better off losing these high-value deposits than paying the higher ADR tax.
The tax here acts as a penalty to encourage banks to lend more and improve the overall economic activity by circulating money through loans.
