KARACHI: Banks pumped Rs2.2 trillion into the non-government sector, mainly the private sector and Non-Bank Financial Institutions (NBFIs), in the first five months of the current fiscal year.

The banks are in haste to maximise their lending to avoid incremental tax, which would be liable on Dec 31.

In budget 2024-25, the government imposed up to 15 per cent tax on banks unable to increase their advance-to-deposit ratio (ADR) to 50pc by Dec 31.

The ADR of banks stood at 38pc in June.

In the second quarter of FY25, banks started lending on a large scale, reducing deposits by charging fees on large deposits and discouraging further deposits.

NBFIs receive Rs1.1tr, private sector Rs997bn in 5MFY25

The latest data issued by the State Bank on Friday showed that the credit to the non-government sector reached Rs2.207tr during July-November against a net retirement of Rs142.8bn in the same period of last year.

The economy has suffered due to extremely low bank advances to the private sector, marring economic growth to the lowest level. However, the main reason for the low credit was the unprecedented 22pc SBP policy rate and record inflation that reached as high as 38pc, an all-time high in May 2023.

However, the recent speedy growth in the bank advances was mainly due to avoiding the incremental tax due to ADR condition. The banks indulge in extensive lending before the interest rate goes further down. The 4.9pc inflation in Nov created room for a more significant cut in the policy rate.

The State Bank has slashed its policy rate by 700bps to 15pc from 22pc in June.

The data further reveals that the banks doled out a record credit of Rs1.142tr to NBFIs during the first five months of the current fiscal year against the net retirement of Rs55.4bn in the same period last year. It is also important to note that the entire stock of credits to NBFIs by the end of June 2024 was Rs441.6bn.

The biggest contribution in the credits to the private sector was of conventional banks as their lending reached Rs698bn during the five months against a net debt retirement of Rs48.6bn in the same period of last year.

The Islamic banks’ lending to the private sector also accelerated to Rs324.9bn against a net debt retirement of Rs28.3bn.

However, the performance of conventional banks’ Islamic windows remained unimpressive. It shows a net debt retirement of Rs25.7bn during the five months of this fiscal year compared to a net debt retirement of Rs1.6bn in the same period of last fiscal year.

Banking experts said the heavy outflows of credits from banks helped them to increase their ADR to 47 per cent. They need to improve it to 50pc by the end of December. Experts said the banks have already succeeded in achieving the target. If a bank’s ADR remains between 40-50pc, it would have to pay up to 6pc tax, bankers said.

Published in Dawn, December 7th, 2024