KARACHI: The banks’ advance-to-dep­osit ratio (ADR) remained at 39.3 per cent last month — much below the red line of 50pc, which attracts a 15pc incremental tax.

The latest data shows that the ADR increased by 90 basis points month-on-month, but fell by 579bps year-on-year to 39.3pc.

The government imposed a 15pc tax in the budget for the current fiscal year on all banks whose ADR was below 50pc.

The purpose of the move was to encou-rage banks to incr­ease lending to the private sector.

Govt will charge 15pc incremental tax on ADR lower than 50pc

The private sector has been starved off bank loans for the last two years due to a high interest rate and political uncertainty. The banks made record profits in CY2023, at times going up to 100pc. They made most of the money by lending to the government.

This situation changed when the State Bank earned a record profit of Rs3.4 trillion and transferred Rs2.7tr into the government’s account during this fiscal year (FY25). This whopping sum allowed the government to reject all bids for treasury bills and in the next auction it was able to raise less than the target and rejected short-term three-month T-bills.

The banks have been trying to lend their money, but their opt­ions are limited. They recently extended Rs360 billion in loans to the Trading Corporation of Pakist­­an and Rs500bn to the Pakistan Agricul­tural Storage and Services Corporation.

During September, advances made by banks rose by 4.2pc m-o-m basis to Rs12.3tr. The advances increased by 3.8pc year-on-year basis.

However, the State Bank’s M2 data shows that the private sector is still retiring debts. Bankers said the private sector borrowing is limited, for short terms and for working capital only.

Frequent cuts in the interest rate, which fell from 22pc in June to 17.5pc now, was not enough to attract the private sector. The market expects another cut of 200 basis points to bring down the interest rate to 15.5pc. This may attract domestic investors to enter the banking market.

Unlike advances, the investment to deposit ratio (IDR) fell by 288 basis points last month (month-on-month basis) to 97.9pc. This decline was due to the government’s rejection of T-bills and repurchasing of t-bills worth Rs351bn.

However, the IDR jumped by 1199 basis points on year-on-year basis. This was due to banks’ huge investment in government papers before the surplus liquidity surfaced in August this year.

Investments went up by 35.7pc in September year-on-year basis to Rs30.7tr, but dropped by 1.1pc month-on-month, reflecting the rejection of T-bills. The deposits increased by 19.1pc year-on-year to Rs31.3tr while it increased by 1.8pc month-on-month.

Published in Dawn, October 25th, 2024