KARACHI: Banks have pumped a record over Rs1 trillion into non-bank financial institutions (NBFIs) to avoid incremental tax in case of failure to take the advance-to-deposit ratio (ADR) at 50 per cent by the end of 2024.

The State Bank’s latest report showed that the influx of huge liquidity exceeded the total stock of credits to NBFIs by 130 per cent.

NBFIs are financial institutions that provide selected financial services but do not hold a banking licence.

Banks have been struggling to avoid incremental tax applicable if they fail to increase the ADR to 50pc by Dec 31, 2024. The banks have been trying to dispose of their excess liquidity by increasing lending and reducing deposit size.

Banks have sent notices to their large account holders with up to Rs1bn to Rs5bn asking them to pay a 5pc fee on their deposits.

The record bank lending to the NBFIs reached Rs1,015.38bn from July 1 to Nov 15 against the net debt retirement of Rs55.8bn in the same period last fiscal year, reflecting the same strategy. The credit amount is 130pc more than the total stock of Rs441.6bn as of June 30.

The FY24 noted a net debt retirement of Rs70.9bn, while the net credit to the sector in FY23 was Rs144.7bn.

In April, some bankers said no bank lending could shut down many NBFIs as the high interest rate damages them. During FY24, the SBP policy rate remained at 22pc, which badly hit all sectors of the economy, but banks remained safe due to the government’s extensive borrowing from them.

Most banks were reluctant to finance the private sector and preferred to park their liquidity in risk-free government bonds.

At the end of the third quarter of FY24, NBFIs made a net debt retirement of Rs93bn against Rs140bn borrowing in the same period last year.

However, the reduced government borrowings after the SBP provided Rs2.7tr in profits changed the lending scenario, forcing banks to lend to the private sector and take measures to minimise deposits to meet the 50pc ADR limit to avoid an incremental tax.

Pakistan has a bank-centric financial system where the share of NBFIs remains small and its contribution to financial intermediation is relatively limited.

Bankers believe Pakistan’s financial depth, inclusion and debt-to-GDP ratio lag behind neighbouring and other emerging countries. There is a vast scope for expansion of the financial services sector to raise domestic resources and lend to private businesses for fixed investment, bankers said.

Published in Dawn, December 1st, 2024

Follow Dawn Business on Twitter, LinkedIn, Instagram and Facebook for insights on business, finance and tech from Pakistan and across the world.

Opinion

Editorial

Electricity relief
Updated 05 Apr, 2025

Electricity relief

If govt ensures that requisite power reforms are implemented, it will earn much praise for reforming a vital segment of the economy.
Trump’s trade wars
Updated 05 Apr, 2025

Trump’s trade wars

Shoddy math applied by US to indiscriminately penalise its trading partners signals the end of an era of global trade liberalisation.
Legalised land grab
05 Apr, 2025

Legalised land grab

THE Modi government has passed a new bill targeting the Muslim community, this time eyeing swathes of priceless real...
More than words
Updated 04 Apr, 2025

More than words

Holistic development can only work when there is organic and credible political activity in the province.
Poor publicity
04 Apr, 2025

Poor publicity

FORTUNE does not seem to be favouring the PTI — at least not yet. With the party’s founder confined from public...
Party pooper
04 Apr, 2025

Party pooper

INDIA’s role of a spoilsport is tiresome. From pulling books from shelves, such as Wendy Doniger’s The Hindus: ...