WHILE it falls short in meeting all of the banking sector’s demands, the next fiscal year’s budget does contain good news, such as the phasing out of the super tax.

For the current fiscal year, banks with an annual income of more than Rs500 million will have to pay four per cent super income tax but in the next four years this tax will vanish, falling by one per cent in each year.

Non-bank companies reporting an annual income of Rs500m and above will pay 3pc super tax this year and will get rid of this tax in three years owing to the one per cent fall each year.

While this does not meet bankers demand that banks be treated at par with non-banking companies, “thank God, the super tax is going to go,” says a senior executive of a local bank.

Whether phasing out the super tax for non-banking companies will have a positive impact on the banking business is a moot point. While theoretically speaking, such companies may see their untaxed earnings rise, it’ll be up to them to decide where to use the increase: in retirement of bank credit, in business operations, or to invest in project expansion plans.

It will be good for the banking business if companies choose to use additional earnings for retiring existing bank credit or for building business capacity with further bank borrowing. The same can be said about the gradual reduction in corporate tax by one per cent each year, bringing it down from the current 30pc to 25pc in FY23.

While this does not meet bankers demand that banks be treated at par with non-banking companies, “thank God, the super tax is going to go,” says a senior executive of a local bank

Apart from this the government’s plan to increase its own bank borrowing to Rs1.015 trillion in the next fiscal year, from an estimated Rs586.5bn in this year, is also good news for banks. The government’s larger bank borrowing targets mean the sector will have greater opportunities for investing funds in zero-risk government debt securities.

However, there is a catch. Though the government normally exceeds its bank borrowing targets “we may not see the same happening in the next fiscal year” as one month after the beginning of the new year in July, “a new political government will be in place”.

A caretaker setup will replace the current PML-N government towards the end of May or in early June and, if nothing goes wrong, general elections will be held by end July.

“Banks should also be prepared to see a reduction in the government’s bank borrowing target if the new political government decides to create more room for banks to enhance private sector credit,” warns a senior executive of one of the top five banks.

In their pre-budget proposals, the banking sector had demanded that the tax rate on its capital gains and dividend income be brought down from 35pc to 30pc although this demand remained unmet.

This is going to continue to eat into banks’ net profit. But removal of tax on bonus shares offered by the entire corporate sector as such would benefit both banks and non-bank companies. In case of banks, it would enable them to invest more in corporate stocks, bankers say.

The newly announced budget is also laden with incentives for almost all sectors barring a few, so that the resultant increase in business activity will benefit banks in many ways: increased demand for private sector credit, greater opportunities for generating non-interest income and availability of more room for exercising prudence in credit appraisals etc.

The government has set agricultural sector credit target at Rs1.1tr for FY19, up from that of Rs1.001tr for FY18. This, too, should encourage banks to reach out to the under-served segments of borrowers and build long-term banking contacts for future gains.

On this sentiment though bankers voiced a contrasting opinion, saying the Rs1.1 tr target for agricultural sector lending is too ambitious, more so because meeting his year’s target of Rs1.001tr target is also unlikely.

Miftah Ismail, the new finance minister, himself admitted in his budget speech that agricultural lending for this fiscal year may end up at Rs800bn. In eight months of the year banks have disbursed Rs570bn agricultural loans.

Expansion in overall private sector credit disbursement of banks is also very likely in the next fiscal year with the economic growth target set at 6.2pc and with a huge Rs1.03tr public sector development plan.

Whether banks would be able to balance their lending to the private sector and investment in debt securities of the government cannot be predicted at the moment. But even if the next government goes for a lower-than-originally targeted bank borrowing, increased private sector credit demand may compensate that, senior bankers say.

Or, if the private sector credit demand remains somewhat subdued due to heightened political uncertainty, then banks will naturally rely on government borrowing that will expectedly remain high in such conditions.

In the next year’s budget the government has conveniently ignored one key demand of banks excluding all resident Pakistanis from the cover of the law that gives immunity against questioning the sources of income of those depositing money in their foreign currency accounts.

Instead of fully meeting this demand Miftah Ismail that only income tax return filers would now be allowed to make cash deposits in their foreign currency accounts.

He said that inflows up to $100,000 per person per year in such accounts would continue to enjoy tax exemption and no questions would be asked from any agency about the sources of such inflows.

Bankers say this still leaves some room for whitening black money. But then the entire exercise of presenting a full FY19 budget by the incumbent government and the populist nature of the budget is being attributed by most analysts and political commentators to PML-N’s efforts to gain political mileage ahead of the general elections.

The government’s move of allowing people to declare their foreign undeclared assets at a flat rate of 3pc and foreign undeclared liquid assets at 5pc, under the umbrella of a tax amnesty scheme is also going to create challenges for banks.

Transactions that would be made by those trying to avail of this scheme might require extra prudence as details of such transactions are often called into question by courts of law, the State Bank of Pakistan and foreign regulatory agencies, bankers fear.

Published in Dawn, The Business and Finance Weekly, April 30th, 2018