New ADR limits likely to hit deposit mobilisation

Published September 19, 2021
The tax rate will be 37.5pc in case the ADR is between 40pc and 50pc. — AFP/File
The tax rate will be 37.5pc in case the ADR is between 40pc and 50pc. — AFP/File

KARACHI: Banks with a high level of investments in government securities will be subject to additional taxation 2022 onwards, which will be bad for their bottom lines.

According to a research report by Topline Securities, the taxable income arising out of the investments in government securities will be taxed at 40 per cent instead of 35pc if the advance-to-deposit ratio (ADR) of the bank is less than 40pc.

The tax rate will be 37.5pc in case the ADR is between 40pc and 50pc. The standard tax rate of 35pc will apply if a bank’s ADR is more than 50pc.

The objective is to nudge commercial banks towards lending and away from risk-free government papers.

According to the latest data, the sector-wide ADR is 47pc, which is less than the threshold of 50pc for additional taxation. The ratio stood at 45pc at the end of June.

“We believe that a weak foreclosure law and its implementation and risk aversion from banks after the 2008 crisis will keep them away from lending aggressively. Also, given the government’s increased borrowing requirements and a rising fiscal deficit, banks will remain the biggest lenders to the government,” wrote Umair Naseer of Topline Securities.

Samba Bank had the highest ADR of 90pc at the end of June, followed by Bank Alfalah (60pc), Faysal Bank (58pc) and JS Bank (55pc). The lowest ADR at the end of June was of Standard Chartered Bank (37pc), National Bank of Pakistan (37pc), MCB Bank (35pc) and United Bank (33pc).

The analyst said banks can also revise their deposit mobilisation strategies to maintain a certain ADR level. Controlling the pace of deposit mobilisation will reduce the ADR and, as a result, save the bank from a higher level of taxation. In addition, banks can also resort to getting rid of their high-cost deposits to improve margins.

The new law entails that the new tax rate will apply to the total income originating from government securities rather than the “additional income” only. “It is an asset class for banks to invest that is risk free, but offers lower yields than advances. The banks can take their risk-reward decisions themselves… even if any penalty on maintaining a low ADR is to be imposed, it must be on additional income from investments in government securities rather than the total income,” Mr Naseer said.

“We believe measures that reduce the government’s fiscal deficit and borrowing requirements could be more effective in forcing banks to lend aggressively,” he noted.

Published in Dawn, September 19th, 2021

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