KARACHI: Banks’ credit to non-bank financial institutions (NBFIs) sharply declined to Rs416 billion during November-May FY25, compared to over Rs1 trillion by mid-Nov FY25.

The State Bank’s latest data showed that banks had pulled back their funds from NBFIs, which were earlier injected largely to avoid government-imposed tax measures.

Banks had pumped over Rs1tr into NBFIs — a record for the sector — apparently as a strategy to avoid the incremental tax applicable in case of failure to achieve an advance-to-deposit ratio (ADR) of 50 per cent by the end of December 2024.

The SBP data revealed that the influx of liquidity into NBFIs exceeded the total stock of credit to the sector by 130 per cent as of mid-November 2024.

NBFIs are financial entities that provide select financial services without holding a banking licence.

Banks in Pakistan had been struggling to avoid the incremental tax linked to ADR shortfalls. The tax was introduced in the FY25 budget, prompting banks to reduce excess liquidity either by increasing advances or by curtailing deposit growth.

In pursuit of the latter, some banks reportedly issued notices to large depositors — with accounts ranging from Rs1bn to Rs5bn — asking them to pay a 5pc fee on their deposits.

However, the government eventually withdrew

The 15pc incremental tax after most banks managed to meet the 50pc ADR target before the December 2024 deadline.

The massive lending to NBFIs was a manifestation of this strategy. From July 1 to Nov 15, lending to NBFIs reached Rs1.015tr, in contrast to a net debt retirement of Rs55.8bn during the same period of the previous fiscal year.

Latest figures show that by May 9 this year, the outstanding credit with NBFIs stood at Rs416.2bn. Following their withdrawal from NBFIs in the second half of FY25, banks increased their investments in government securities, while advances to other sectors dropped significantly.

During July-May FY24, credit to NBFIs was negative, with net debt retirement amounting to Rs108.2bn.

The Rs1.015tr credit extended to NBFIs was 130pc more than the total credit stock of Rs441.6bn held by the sector as of June 30, 2024.

In April 2024, some bankers warned that a halt in bank lending to NBFIs could lead to closures of several institutions, as persistently high interest rates were hurting both banks and NBFIs.

Throughout FY24, the policy interest rate remained at 22pc, severely impacting the broader economy and allied sectors. However, banks remained insulated due to the government’s extensive borrowing from the banking system.

Most banks continued to avoid financing the private sector, preferring instead to park their liquidity in government bonds.

Published in Dawn, May 22nd, 2025