• Take measures to discourage deposits, against banking norms
• Advance-to-Deposit Ratio jumps to 44pc from 39pc in a month
• Much of lending reportedly funnelled to DFIs for short-term loans

KARACHI: Banks have managed to increase their Advance-to-Deposit Ratio (ADR) to 44 per cent in a bid to avoid the 15pc incremental tax due at the end of 2024, analysts said on Wednesday.

The government — keen to extract more revenue from banks that recorded unprecedented profits in 2023, nearly double the previous year — appears to have been thwarted as banks rapidly increase lending to minimise additional tax liabilities.

Banks’ lending surged by Rs1.1 trillion in October, marking a record-breaking increase. Traditionally, banks have relied heavily on risk-free investments in government securities. However, to meet the tax requirements introduced in this fiscal year’s budget, banks are shifting their strategies.

“As per weekly data, the banking sector’s gross ADR ratio increased to 44pc as of Oct 25, 2024, up from 39pc on Sept 27, 2024,” said Mohammad Sohail, CEO of Topline Securities.

The FY25 budget stipulated that banks with an ADR below 50pc would face up to 15pc incremental tax. The banking sector began the fiscal year with an average ADR of 38pc, but activity in the last quarter indicates a concerted effort to avoid falling into this tax bracket.

Decline in deposits

ADR measures the proportion of a bank’s total deposits that are given out as loans or advances. It indicates how much of the money deposited by customers is being used for lending activities. The government imposed a tax on banks whose ADR is below 50pc, encouraging them to lend more rather than hold excess deposits.

However, to reduce excess liquidity and tax exposure, banks have also taken measures to discourage deposits — actions criticised as being contrary to banking norms.

“Many banks have notified clients that they will charge a fee of up to 5pc on large deposits, such as Rs5 billion or more,” said Tahir Abbas, head of research at Arif Habib Securities. “These kinds of depositors are few, but they matter at this time as the race for reducing liquidity before Dec 31 is going on.”

This has led to a decline in deposits, falling from Rs31.14tr on Sept 30 to Rs30.4tr by Oct 25.

One contributing factor to banks’ increased lending activity is the government’s reduced borrowing requirements. The State Bank of Pakistan transferred Rs2.7tr in profits to the government at the close of FY24, reducing the need for significant borrowing. Although government borrowing has resumed, it remains below targets, and yields on government securities have fallen sharply.

Banks are reportedly funnelling much of their lending into Development Finance Institutions (DFIs) for short-term loans. “This money will return to the banks after December 31, once the tax deadline has passed,” Mr Abbas said.

He added that banks can reduce their tax liability to 6pc if they maintain an ADR between 40pc and 50pc.

According to Topline Securities, gross advances grew by 11pc to Rs13.4tr as of Oct 25, while deposits declined by 1pc to Rs30.5tr.

Meanwhile, the Investment-to-Deposit Ratio (IDR) has shifted significantly. According to a banking publication, the IDR increased from 33pc in 2007 to 88pc in 2023 and 94pc in June 2024.

However, the situation changed during the July-October period as the banks were unable to invest in government securities on a large scale and were also busy reducing deposits to avoid tax burdens.

Published in Dawn, November 21st, 2024