KARACHI: Banks seem to have hit the brakes on deposit mobilisation in December, a rare development that analysts attribute to the lenders’ attempt at reducing their tax bills.

In a break from the past when bankers would hustle for deposits at the end of the calendar year to meet performance targets, the annual pace of deposit mobilisation slowed down to 7.1 per cent for 2022, down from 17pc for 2021.

Their attempt to limit the deposit accumulation is meant to increase the advance-to-deposit ratio (ADR) — a performance benchmark that the government is using to charge a new tax on banks.

The ADR measures loans as a percentage of deposits. A lower ADR means the bank is investing a higher proportion of its deposits in risk-free government securities while ignoring private-sector borrowers.

“Banks want their ADRs to be recorded at a higher level, which’ll save them from the new tax,” JS Global Head of Research Amreen Soorani said while speaking to Dawn on Thursday.

A bank can improve its ADR by either increasing its loans (numerator) or decreasing its deposits (denominator). Instead of loaning out more funds to improve their ADRs, banks seem to be limiting the accumulation of deposits. The ADR-related tax was to be calculated at the end of December.

A gross ADR of over 50pc will attract no additional tax. But a bank’s income from federal government securities will be taxed at an additional 10pc rate if its gross ADR drops below 50pc. The tax rate will be 16pc if the ratio falls below 40pc.

Deposits shrank 1.2pc in December on a month-on-month basis alone. “It’s rare that deposits decreased in December on a monthly basis. December is when deposits usually grow at a very high pace,” she said.

Annual deposit growth fell to a 14-year low in 2022 as deposits amounted to Rs22.4 trillion.

“I think the year-on-year growth rate will normalise in January. We’ll likely see the rate of deposit increase go back to the double digits,” she said.

Published in Dawn, January 13th, 2023

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