THE proposed size of bank borrowing envisaged in the federal budget FY17 has come as good news for banks particularly at a time when the private sector borrowing is also expected to rise due to the stipulated economy-boosting measures.

But the government decision to keep the tax rate on banks discriminately higher than the one applicable on all other companies is, from bankers’ point of view, a bad news. And, the announcement made in the budget that banks shall continue to pay the super-tax, imposed on affluent companies and individuals in FY16 and extended for FY17, also at a higher rate is quite ‘disturbing’, senior bankers say.

Finance Minister Ishaq Dar informed the parliament that to balance income and expenses the government will borrow from banks about Rs453bn in FY17 against the FY16 original target of Rs283bn and revised budgetary estimate of around Rs199bn. This will give banks an opportunity to banks make larger investment in risk-free government debt papers and boost their interest income.

Given the fact that the budget also proposes a host of measures to boost economy through more vigorous private sector activities, banks can also capitalise on incremental private sector credit demand. And, both factors combined should allow banks to make more money.

But NBFIs executives fear that banks’ investment in NBFIs may shrink further due to a very high government bank borrowing target and in the wake of a likely surge in private sector credit demand. “Resource mobilisation for NBFIs may continue to remain a problem for us in the next fiscal year,” says an official of Modarabas and NBFIs Association.

Enhancement of agricultural credit target from Rs600bn in FY16 to Rs700bn in FY17 can provide conventional commercial banks, Islamic banks and microfinance banks more business. Since this lending is on revolving basis and the rate of recovery is up to 97pc, the participating banks in targeted agricultural lending can always make decent gains.

Already in FY16, banks are close to meeting the set target and given the fact that incentives announced in the budget FY17 for agricultural sector can further enhance credit demand, lending an additional Rs100bn should not be too difficult.

A strong growth of 4.6pc in large scale manufacturing sector’s output in FY16 is being seen as a precursor to further growth next year particularly after the announcement of various incentives in the budget and backed by a modest increase in foreign direct investment. The resultant rise in industrial credit demand could mean more of gainful business by banks, if tapped efficiently.

A 10pc increase proposed in the development expenses with a significant part of it going to physical infrastructure and water and power sectors is expected to create diverse business opportunities for banks.

These projects while impacting favourably on industrial and agricultural uplift of targeted regions, in general, and on overall economic activity in particular, would require support of banks and insurance companies to cater to numerous networks of contractors and suppliers.

Once the uplift schemes start nearing maturity creating more employment for local population and supporting small businesses, specialised banking and insurance services should see a surge in demand, bankers say.

Measures proposed to be taken to augment sagging exports and revive the troubled textile sector will do the same good for banks and insurance companies, they say.

But bankers and executives of insurance companies still wonder what is in store for them in relation to the projects related to China-Pakistan Economic Corridor. Finance Minister Ishaq Dar just made a casual reference to CPEC in his budget speech but offered no specifics.

“How much worth of $46bn long-term CPEC projects are coming up in the next fiscal year remains publicly unknown. And we remain clueless on how to prepare ourselves to handle them,” says head of one of the top five banks.

Executives of insurance companies say the budgetary announcement for bringing all taxes on various sources of insurance business into one basket along the lines of banking tax could prove a bane or boon depending upon its details. “We’re waiting for the one-tax policy to unfold immediately.

If the tax rate is fixed on a higher side as was done with banks then we’ll be in trouble,” says a senior executive of a leading insurance company. “In our case, the trouble would be greater because unlike banks insurance companies, particularly those in the non-life sector, are not earning too much due to lower penetration rate and rising insurance claims.”

The Prime Minister’s health insurance scheme announced in the budget is expected to enliven business of life-insurance companies that have already begun to thrive in the past few years after going through rough waters in the post-2008 global economic recession.

The lowering of the 12pc tax to 8pc on commission of life insurance agents (if their commission does not exceed Rs0.5m and if they are regular tax return filers) is another good thing that can be helpful in promoting life-insurance business through a more spirited workforce at grass root levels.

Generally speaking, economy-enhancing budgetary measures and proposed mega development projects should reinvigorate investment banks and leasing companies as well.

But for housing finance companies and for banks’ mortgage financing operations, the proposed levy of 10pc capital gain tax on immovable property (if sold out within five years of acquisition) could discourage investment in housing sector.

But then, the doubling of the limit (from Rs1m to Rs2m) on tax allowance available to housing finance seekers on mortgage loans markup and simplification of tax on renting housing units can offset its impact, facilitating the housing credit demand to remain intact.

Published in Dawn, Business & Finance weekly, June 6th, 2016